Document of The World Bank & MIGA FOROFFICIALUSEONLY ReportNo: 31764-LA PROJECTAPPRAISALDOCUMENT ON A PROPOSEDIDA GRANT (NAM THEUN 2 SOCIAL AND ENVIRONMENT PROJECT) INTHEAMOUNT OFSDR13.1MILLION(US$20MILLIONEQUIVALENT) TO THE LAO PEOPLE'S DEMOCRATICREPUBLIC AND A PROPOSEDIDA PARTIAL RISK GUARANTEE INTHE AMOUNT OFUPTOUS$50MILLION FOR A SYNDICATED COMMERCIALLOAN AND PROPOSEDMIGA GUARANTEES OFUP TO US$200MILLION INLAO PEOPLE'SDEMOCRATIC REPUBLICAND THAILAND FOR A SYNDICATED COMMERCIALLOANTO AND AN EQUITY INVESTMENTIN THE NAMTHEUN 2POWER COMPANY LIMITED FOR THE NAMTHEUN 2 HYDROELECTRICPROJECT March31,2005 Infrastructure Department Environmental and Social Project Finance and Guarantees Operations Department East Asia and Pacific Department Infrastructure Economics and MIGA Region East Asia and Pacific Finance Region This documenthas a restricteddistribution andmay be usedby recipientsonly inthe performanceof their official duties. Its contents mav not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate EffectiveFebruary 28,2005) Currency Unit = US Dollars SDR0.65335 = U S $ l US$1.53057 = SDR 1 FISCALYEAR October 1 - September30 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank FMAC Financial Management Adjustment AFD Agence FranCaisede Dkveloppement Credit AFTA ASEAN Free Trade Area FMCBC Financial Management Capacity ASEAN Association of Southeast Asian Na- Building Credit tions FMR Financial Monitoring Report BOOT Build-Own-Operate-Transfer FNPV Financial Net Present Value C A Concession Agreement FSL FullSupply Level CAS Country Assistance Strategy GDP Gross Domestic Product CCGT Combined Cycle Gas Turbine GIEK Guarantee Institute for Export Credits CEM Country Economic Memorandum (Norway) CIA Cumulative Impact Assessment GLIP Government Letter of Implementa- COD Commercial Operations Date tion Policy COFACE Compagnie FranGaised'Assurance GMS Greater Mekong Subregion pour le Commerce ExtBrieur GOL Government of the Lao PDR CTA Common Terms Agreement GOLE Government of Lao PDR Engineer cw Civil Works GWh Gigawatt Hour DGA Development Grant Agreement H C Head Contractor DSCR Debt Service Cover Ratio HCC HeadConstruction Contract D S M Demand Side Management HCCEMMP Head Construction Contractor's Envi- DSRP Dam Safety Review Panel ronmental Management and Moni- E&S Environmental and Social toring Plan EAMP Environmental Assessment and HIPC Heavily IndebtedPoor Countries Management Plan IAG International Advisory Group EAP East Asia and the Pacific Region IBRD InternationalBank for Reconstruction ECA Export Credit Agency and Development EDFEDFI Electricit6 de FranceEDF Internatio- IDA InternationalDevelopment Associa- nal tion EDL Electricit6 duLaos IDC InterestDuring Construction EGAT Electricity Generating Authority of IF1 InternationalFinancial Institution Thailand IMA Independent Monitoring Agency EGCO Electricity GeneratingPublic Com- IMF InternationalMonetary Fund pany Limited (Thailand) INTOSAI International Organization of Su- EIB European Investment Bank preme Audit Institutions EKN Exportkreditnamnden (Sweden) ITD Italian-ThaiDevelopment Public EMDP Ethnic Minority Development Plan Company Limited (Thailand) EM0 Environment Management Office of km Kilometer NTPC kV Kilovolt EMU Environmental Management Unito f kWh Kilowatt hour STEA LEnS Lao Environment and Social Project ERR Economic Internal Rate of Return L/C Letter of Credit ESCO Engineering & Service Co., Ltd., a LDP Letter of Development Policy subsidiary o f EGCO LHSE Lao Holding State Enterprise ESU Environment and Social Unit LNCE Lao National Committee on Energy FIRR Financial Internal Rate of Return LTA Lenders' Technical Advisor FLUPAM Forest and Land Use Planning and M&E Monitoring and Evaluation Management M A S L Meters Above Sea Level MDG Millennium Development Goal PRG Partial Risk Guarantee MIGA Multilateral Investment Guarantee PRGF Poverty Reduction and Growth Agency Facility MIH Ministry of Industry and Handicrafts PRSC Poverty Reduction Support Credit MM Million PRSP Poverty Reduction Strategy Paper MOF Ministryof Finance PSDP Power Sector Development Plan MRC MekongRiver Commission PV Present Value MOU Memorandum of Understanding RAP Resettlement Action Plan MW Megawatt RMU Resettlement Management Unit of NCB National Competitive Bidding Khammouane Province NGPES National Growth and Poverty Eradi- RO Resettlement Office of NTPC cation Strategy SA Shareholders Agreement NGO Nongovernmental Organization S A 0 State Audit Organization NIB Nordic Investment Bank SDP Social Development Plan NNTNPA Nakai Nam Theun National Protected SEMFOP Social and Environment Management Area Framework and First Operational NPA National Protected Area Plan NPV Net Present Value SESIA Summary Environmental and Social NS National Shopping Impact Assessment NT2 NamThem 2 SIA Strategic Impact Assessment NTPC NamTheun 2 Power Company Lim- SMEC Snowy Mountain Engineering Com- ited pany (Australia) NTSEP NamTheun 2 Social and Environ- SSEP Site-Specific Environmental Plans ment Project STEA Science, Technology and Environ- PAP Project-Affected PersodPeople ment Agency PCA Procurement Capacity Assessment THB Thai Baht PDO Project Development Objective UNDP United Nations Development Pro- PEMSP Public Expenditure Management gramme Strengthening Program USC US cent PIP Project ImplementationPlan WACC Weighted Average Cost of Capital PIZ Peripheral Impact Zone WMPA Nakai NamTheun Watershed Man- PMF Probable Maximum Flood agement and Protection Authority POE Panel of (Environmental and Social) WTO World Trade Organization Experts XBF Xe Bang Fai PPA Power Purchase Agreement PPAM Participatory ProtectedArea Man- agement For IDA Vice President: Jemal-ud-din Kassum Country Director: IanC. Porter Sector Director - EASIN: Christian Delvoie Sector Director - EASES: Maria Teresa Serra Country Manager Enrique Crousillat NT2 Project Manager: Robert Anton Mertz NTSEPTask TeamLeader: Patchamuthu Illangovan Guarantee TeamLeader: Pankaj Gupta For MIGA Director, Operations Department: Tessie San Martin Vice President and General Counsel: LuisDodero Director, Economics and Policy: Frank J. Lysy Guarantee Team Leader: Philime Valahu The following staff and consultantswere responsiblefor preparing this PAD: Robert Anton Mertz (NT2 Project Manager), Patchamuthu Illangovan (NTSEP Task Man- ager), Suman Babbar, Alpona Banerji, Mara Baranson, Mohammed Bekhechi, Adrian Fozzard, Katherin Golitzen, Pankaj Gupta, Valerie Hickey, Svend Jensby, Jeffrey Lecksell, Norma Leon, Darayes Mehta, Oithip Mongkolsawat, Glenn Morgan, John Morton, Elena Palei, Alessandro Palmieri, Carla Sarmiento, Mark Segal, Lynne Sherbume-Benz, Jayasankar Shivakumar, Michael Silverman, Nipa Siribuddhamas, Jennifer Thomson, Anthony Toft, Philippe Valahu, Anthony Whitten, Chaohua Zhang, and Ron Zweig. CONTENTS A STRATEGICCONTEXTAND RATIONALE FOR BANKINVOLVEMENT . ............................................. 3 A.l 3 Higher Level Objectives to which the Project Contributes ............................................................................ Country and Sector Issues .............................................................................................................................. A.2 5 A.3 Rationale for Bank Involvement..................................................................................................................... 6 A.4 Controversial Aspects, Bank Responseand Progress..................................................................................... 7 B PROJECTDESCRIPTION . ................................................................................................................................ 10 B.l Project Development Objective.................................................................................................................... 10 B.2 Project Components................. ................................................................................................................ 10 3.3 Project Beneficiaries. Impacted Groups. and Key Project Indicators........................................................... 13 B.4 15 Project Cost and Financing........................................................................................................................... NT2 Revenue and Expenditure Management............................................................................................... B.5 18 B.6 Bank Group Instruments............................................................................................................................... 21 B.7 Lessons Learned andReflected inProject Design........................................................................................ 24 B.8 Alternatives Considered ............................................................................................................................... 26 C IMPLEMENTATION . ......................................................................................................................................... C.1 Partnership Arrangements ................. 27 ..................................................................................................... 27 C.2 Institutional and Implementation Arrangements .......................................................................................... 28 (2.3 31 Critical Risks and Mitigation Measures ....................................................................................................... Monitoring and Evaluation of OutcomesAXesults......................................................................................... C.4 32 C.5 Sustainability ................................................................................................................................................ 36 C.6 Recourse Options ......................................................................................................................................... 37 C.7 Grant and Guarantee Conditions and Covenants .......................................................................................... 37 D APPRAISALSUMMARY 42 D 1 .. .................................................................................................................................. Economic and Financial Analysis ................................................................................................................ 42 D.2 Technical ...................................................................................................................................................... 48 D.3 Fiduciary....................................................................................................................................................... 49 D.4 51 Environment ................................................................................................................................................. Social............................................................................................................................................................ D.5 54 D.6 55 Policy Exceptions and Readiness ................................................................................................................. Safeguard Policies ........................................................................................................................................ D.7 62 LIST OFANNEXES Annex 1. A-3 Annex 2. Decision Framework for the Nam Theun 2 Project............................................................................ A-43 Country and Sector Background ........................................................................................................ Government Letter of Implementation Policy (GLIP) ......................................................................... A-25 Annex 3. Major RelatedProjects Financed by the Bank andor other Agencies ............................................... A-50 Annex 5. Annex 4. Results Measurement Framework and Monitoring and Evaluation Arrangements ............................ A-52 Annex 6. Detailed Project Description ............................................................................................................. A-71 Annex 7. Annex 8. Project Costs and Financing Plan....................................................................................................... A-92 Annex 9. Financial Management and Disbursement Arrangements .................................................................. Implementation Arrangements ........................................................................................................... A-94 A-97 Annex 10 A-104 Economic and Financial Analysis .................................................................................................... Procurement Arrangements .............................................................................................................. Annex 11.. a-115 Annex 12. Safeguard Policy Issues................................................................. ............................................ A-150 Annex 13. Consultation and Disclosure............................................................................................................. A- 188 Annex 14 Annex 15. . Analysis of Alternatives ................................................................................................................... A-200 A-205 Annex 16. A-208 Annex 17. IDAGuarantee Structure.................................................................................................................. Project Processing (Preparation and Supervision) ............................................................................ ...................................................................... Annex 18. Partnership Principles....................................................................................................................... Revenue and Expenditure Management... A-230 Annex 19. Documents inthe Project File .......................................................................................................... A-232 Annex 20. Statement of Loans and Credits........................................................................................................ A-234 Annex 21. Country at a Glance.......................................................................................................................... A-235 LIST OFMAPS M A P IBRD33574 MAP IBRD33575 MAP IBRD33576 LIST OF TABLES Table 1. Project Costs Table 2. Environmental and Social Costs and Funding Table 3. Project FinancingPlan Table 4. Allocation of Key Risks Table 5. MIGA Underwriting Structure Table 6. Lessons Learned and Incorporatedinto Project Design Table 7. Key Implementation Risks and Mitigation Measures Table 8. Economic Rate of Return and Sensitivity Tests Table 9. Project Returns (FNPVs and FIRRs) Table 10. Nominal Revenues to GOL Table 11. Sensitivity and Scenario Analysis LIST OF FIGURES Figure 1. Schematic Diagram of the NT2 Hydropower Facility Figure 2. NT2 Contractual Structure Lao People's Democratic Republic NamTheun 2 Hydroelectric Project PROJECT APPRAISAL DOCUMENT East Asia andPacific Region EASEG/ EASES Date: March 31, 2005 TeamLeaders: Robert Anton Mertz, Patchamuthu Country Director: IanPorter Illangovan, Pankaj Gupta, Philippe Valahu Sector Directors: Christian Delvoie, Maria Teresa Serra Sectors: Power (96%), Environment (4%) Project ID: PO76445 Themes: Infrastructure Services for Private Sector De- Lending instruments: IDA Guarantee, velopment, Other Environmental and Natural Resource MIGA Guarantees, and IDA Grant Management, Other Social Development [] Loan[] Credit [XI Grant [XI Guarantees [] Other For Loans/Credits/Others: Amount (US$m): Upto US$50.00for IDA Guarantee, up to US$200for MIGA Guarantees, US$20.00(in SDR equivalent) for IDA Grant 157.50 157.50 Electricity GeneratingPublic Company Ltd. 112.50 112.50 Italian-Thai Development Public Company Ltd. 67.50 67.50 160.00 160.00 340.00 340.00 Borrower: Lao PDR (for IDA Grant); NamTheun 2 Power Company Limited(for guaranteed financing) ResponsibleAgency: Ministry of Finance For IDA Guarantees: [ ] Partial Credit [XIPartialRisk Proposedcoverage: Lao sovereign risksas defined inProject Agreements, including expropriation, issuance and renewal of permits, change in law, termination events etc., which are directly incontrol of Lao PDR and are deemed critical for obtaining financing. Project sponsors: Electricit6 de France (France), Electricity Generating Public Company Limited(Thailand) and Italian-ThaiDevelopment Public Company Limited (Thailand) Nature of underlyingfinancing: private commercial debt provided by nine international dollar lenders Termsof financing for IDA Guarantee: Principal amount (US$m): up to 50.00 Final maturity: 16.5 years Amortization profile: Tailor-made Financingavailable without guarantee: [ ] Yes [XIN o Ifyes, estimatedcostor maturity: Estimatedfinancing cost or maturity with guarantee: Does the project depart from the CAS incontent o r other significant respects? Ref. PAD No A.3 Does the project require any exceptions from Bank policies? Ref. PAD 0.7 No Have these been approved by Bank management? NA I s approval for any policy exception sought from the Board? No Does the project include any critical risks rated "substantial" o r "high"? Ref. PAD C.4 Yes Does the project meet the Regional criteria for readiness for implementation? Ref. PAD Yes D.7 Covenants applicable to project implementation: See PAD C.7 2 A. STRATEGICCONTEXTAND RATIONALEFORBANKINVOLVEMENT A.l Countryand Sector Issues 1. With a population of 5.7 million, a per capita income of US$340 in 2003, and human development indicators that are among the lowest in the East Asia Region, the Lao People's Democratic Republic (Lao PDR) is a sparsely populated and landlocked country with exten- sive natural resources. Over the past two decades, Lao PDR's economy has been movinggradu- ally toward a market-oriented system. Growth performance has been strong, averaging 6 percent per year between 1991 and 2003. Lao PDR has also made significant progress in reducing pov- erty over the past decade.' Poverty incidence (headcount) declined from about 46 percent to ap- proximately 33 percent of the population between 1992/3 and 2002/3. However, geographical disparities are large. Poverty incidence in the Government of Lao PDR's (GOL) designated 47 priority districts i s twice as high as that of the other 70 districts. Poverty incidence i s also high among ethnic minority communities. While progress i s being made towards meeting some of the Millennium Development Goals (MDGs), many are not on track. Limited capacity in the central and provincial governments, a fledgling private sector, lack o f infrastructure, and the absence of strong civil society organizations also pose severe challenges to growth. 2. Lao PDR's National Growth and Poverty Eradication Strategy (NGPES) is a govern- ment-owned strategy that lays out the country's development vision. The NGPES articulates a medium-term reform strategy and sector programs aimed at sustaining growth and rapid poverty reduction. Developed through a participatory and consultative process within the country and endorsed by the National Assembly in October 2003, the NGPES lays out the country's overall development framework and serves as the basis for donor support. The Bank's new Country As- sistance Strategy (CAS) supports the NGPES through a program of analytical and advisory ac- tivities, and ongoing and new operations that will include both investment operations and a se- quence of Poverty Reduction Support Credits (PRSCs). per year and sustain this level up to 2020 if it is to attain its poverty reduction targets, More 3. Lao PDR will need to achieve gross domesticproduct (GDP) growth rates of 7percent importantly, Lao PDR has to focus on improving the quality of growth. The Bank's recent Coun- try Economic Memorandum (CEM)2 concluded that with its significant natural resources and central position in the rapidly growing Greater Mekong Subregion (GMS).3 Lao PDR i s well placed to achieve quality growth and reduce poverty, provided that the Government manages to increase the contribution of natural resources (especially sustainable hydropower and mining) to development; fosters a more enabling environment to promote private sector investment; and un- dertakes reforms to improve the quality of governance, management of public finances, and ser- vice delivery. At the same time, the Government will need to address the structural constraints to growth, particularly the need for strengthened institutional capacity at all levels of the admini- stration. ' Further details on Lao PDR's recent economic performance are inAnnex 2. Lao PDR, Country Economic Memorandum, "Realizing the Development Potential of Lao PDR," Two Vol- umes, dated December 23,2004. The GMS comprises Lao PDR, Thailand, Vietnam, Cambodia, Myanmar, and Yunnan Province of the People's Republic of China. . 3 4. Natural resource development, especially hydro-power and mining, is integral to Lao PDR's development strategy for sustainingpast growth rates and achieving the MDGs.~ The NGPES growth target of 6-7 percent per annum over the next decade i s not feasible without sus- tainable natural resource development in addition to strong growth of agriculture, manufacturing, and services. Mining and hydropower development can add more than 1.5 percentage points to the aggregate GDP growth of 5 percent a year that Lao PDR can obtain from agriculture, manu- facturing and services ~ombined.~Without this additional growth from natural resources, Lao PDRcannot achieve its NGPES objectives. 5. The NGPES identifies the power sector as one of the potential drivers of growth. The power sector serves two national priorities: first, promoting economic and social advancement by providing a reliable, affordable, and sustainable domestic source of electricity; and second, mo- bilizing foreign exchange and budgetary revenues to finance poverty reduction and environ- mental and social programs. The domestic power system in Lao PDR i s still at an early stage of development, comprising four networks, none of which are interconnected. Although access to the network has increased significantly in recent years, only 43 percent of households have ac- cess to electricity and per capita consumption i s among the lowest in Asia. Domestic consump- tion currently accounts for two thirds of total production. 6. The abundance of hydropower resources and the central location of the country in the rapidly growing GMSprovide Lao PDR with a strategic advantage as regional power markets move towards closer integration. Lao PDR has been a key participant inthe recent development of bilateral power trade, signing memoranda of understanding (MOU) with Thailand (for 3,000 MW) and with Vietnam (for 1,500 MW) to export hydroelectric power. Nam Theun 2 (NT2) would be the third dam built mainly to serve the Thai market, following Nam Ngum 1(150 MW) commissioned between 1971 and 1984, and Theun Hinboun (210 MW) commissioned in 1998. In2003, power exports accounted for about 30 percent of total export earnings. The World Bank Group and ADB are supporting GMS countries to develop an integrated GMS power market. In addition, Lao PDR i s a member of the Mekong River Commission (MRC) which seeks to de- velop and follow an integrated approach to river basin management in the sub-region. 7. Thefull developmentbenefits of past hydropowerprojects have, however, proved diffi- cult to achieve. Government's share of equity inprevious hydropower projects has been heldby ElectricitC du Laos (EDL), which has used part of the dividends from investments to subsidize its operations, thereby not only reducing the level of GOL revenues but also distorting tariffs from these projects. Additionally, environmental and social impacts of hydropower development of- tentimes have not been properly addressed due to limited upfront assessment of impacts, limited budget for implementation of environmental and social outcomes, and limited monitoring and oversight. The Theun Hinboun dam, located downstream from the proposedNT2 dam site on the Nam Theun River, has provided important lessons and comparisons, especially with regard to mitigation of downstreamimpacts and involuntary resettlement policies. During the period 1991-2000 Lao PDR grew at annual average rate of 6.3 percent and during 2001-04 at 5.6 percent, implying an average growth of 6 percent a year for the last 14 years. Agriculture is unlikely to grow faster than 3 percent a year over the next decade, despite an exceptional past rate of 4.5 percent a year inthe 199Os, while manufacturing and services sectors are most likely to grow at around 8 and 6 percent a year, respectively. Forestry is unlikely to contribute much. This adds up to only 5 percent a year. See CEM, 2004. 4 8. The challengefacing the NT2 project is to realize the benefits of hydropower develop- ment, while minimizing the environmental and social costs that have accompanied many of the previous hydropowerprojects. Electricity generation for export, financed by the private sec- tor and anchored on solid economic, financial, environmental and social foundations, has the po- tential to significantly increase revenues and improve living standards in Lao PDR. The most recent strategic planning exercise for the sector, the Power System Development Plan (PSDP) of August 2004, studied optimal system development to further both domestic and regional export objectives.6 The plan concluded that the proposed NT2 project i s the least-cost alternative to supply power to export and domestic markets. Heeding the lessons of the past, the upfront as- sessment of environment and social issues for the NT2 project has been thorough and included a robust implementation plan detailing the necessary institutional arrangements, budget oversight and contingency measures for effective implementation of the environmental and social man- agement plan. Issues surrounding management and use of the revenues from the project have also been addressed very carefully. A.2 Higher Level Objectives to which the Project Contributes 9. NT2 supports GOL's strategy for promoting growth through private sector develop- ment, regional integration and the sustainable development of Lao PDR's natural resources. NT2 reinforces - rather than substitutes for - GOL's broader development efforts. N T 2 i s a ma- jor private sector project, and if successfully implemented, can have an important signaling ef- fect, demonstrating Lao PDR's potential for large-scale private investments, and enlarging the country's access to international financial markets. NT2 will lead to further integration into the regional power network, as part of a broader process of regional economic integration within the framework of Lao PDR's membership in the Association of Southeast Asian Nations (ASEAN) and ASEAN Free Trade Area (AFTA).NT2i s also consistent with the broader policy of promot- ing the sustainable development of Lao PDR's natural resources through investments in profit- able and sustainable hydropower projects. 10. NT2 provides an opportunity to develop policies and tools which will strengthen the Government's capacity to manage sustainably Lao PDR's natural resources, promote biodi- versity and protect ethnic minorities. With its large geographic footprint and multiple impacts, the project constitutes a test case for project-specific environmental and social protection policies that have the potential to be broadly replicated throughout the country. Recognizing this oppor- tunity, the Government, the Bank and other development partners have dedicated an extraordi- nary level of effort into the preparation of the project. The project encourages improved hydro- power planning and development and strengthens the GOL's capacity to conduct and apply the findings of environmental assessments, resettlement action plans, ethnic minority development plans and other related instruments in the hydropower sector. It can also provide impetus for the development of irrigation in and around the project area. Successful implementation of NT2 in concert with the international community will demonstrate the GOL's long-term commitment to sustainable development, and its willingness to engage with the local population in designing and implementing a program of shared benefits at the national, regional and local levels. Maunsell-LahmeyerInternational,Power SystemDevelopmentPlanfor LaoPDR, August 2004. 5 11. NT2 contributes revenues needed to finance Lao PDR's poverty reduction and devel- opment strategy. The principal benefit from the NT2 project to Lao PDR will be from the US$1.95 billion (in nominal terms) of GOL revenues that the project will generate over the twenty five year concession period from 2009-2034 (see paragraph 44). Significant increases in the level of spending on education, health and basic infrastructure are needed if Lao PDR i s to reduce poverty and make progress towards the MDGs. As the recent C E M points out, mobiliza- tion of revenues from the development of the NT2 i s an important part of a package of policy, administrative and developmental measures needed to increase revenue yields over the medium to long-term. 12. NT2 highlights the importance and urgency of the Government's efforts to strengthen weak expenditure management systems. The NGPES recognizes that "sound, accountable and transparent financial management i s an integral part of Government efforts to increase efficiency of public management and resource allocation." The NT2 project has stimulated progress in this area. But further progress will be essential if NT2 revenues are to be applied transparently and efficiently to the financing of priority expenditure programs for poverty reduction and environ- mental conservatiodmanagement, reflecting policy priorities laid out in the NGPES and its suc- cessors, from the time that revenues come on stream. A.3 Rationale for Bank Involvement 13. The Bank has been involved in the preparation of NT2 in recognition of the project's developmentpotentialand its role as a driver of reform. The new CAS recognizes that NT2 can play an important role in the broader development agenda over the medium term, and, in fact, the fourth CAS objective is to support implementation of NT2 as an example of an area-based, sus- tainable natural resource development project that can contribute to growth and capacity devel- opment and that has been designed with thorough consideration for environmental and social as- pects. From the Bank's perspective, implementation of N T 2 reinforces CAS interventions in support of the broader reform agenda and development objectives, notably by building capacity for sustainable natural resource management and infrastructure development; improving trans- parency and effectiveness of public expenditure management systems; and strengthening part- nerships with development partners, the private sector, communities and other key stakeholders. 14. The Bank is one of the few institutions with the broad range of skills needed to assist the GOLin the sustainable developmentof a large,private sector-financed hydropowerproject with multiple social and environmental impacts.The Bank, working closely with the Asian De- velopment Bank (ADB) and Agence FranCaise de DCveloppement (AFD), has contributed exper- tise in project financing, appraisal and supervision, as well as on sector, regulatory and institu- tional development issues. Bank safeguards policies have served as a benchmark for the project, ensuring that the environmental and social dimensions of the project are adequately addressed. Progress made thus far in this regard, if sustained and consolidated, has the potential to influence the future hydropower development inLao PDR (including inareas such as participation, consul- tation, and disclosure of information). The Bank has also helped GOL and development partners manage the linkages between the project and on-going institutional and governance reforms which are critical to the developmental success of the project, particularly as regards revenue management, 15. Theproject would not be bankablefor private lenders without the support of interna- tionalfinancial institutions (IFIs),bilateral donors and export credit agencies (ECAs),given 6 the large amount of private capital required, perceived sovereign risks and Lao PDR's un- proven track record of attracting large-scale investments.B y all accounts, NT2 i s a very large private sector investment, not only in Lao PDR but internationally, with project costs amounting to about US$1.25 billion (excluding contingencies). Support from multilateral institutions - the World Bank Group (the International Development Association (IDA) and the Multilateral In- vestment Guarantee Agency (MIGA)), the ADB, the European Investment Bank (EIB) and the Nordic Investment Bank (NIB), bilateral donors, including AFD and Proparco (France), and ECAs, including Compagnie FranCaise d'Assurance pour le Commerce ExtCrieur (COFACE, France), Exportkreditnamnden (EKN, Sweden), Guarantee Institute for Export Credits (GIEK, Norway), and Export-Import Bank of Thailand (Thai-Exim) - in the form of direct loans and guarantees for the proposed limited-recourse commercial debt package i s critical to bring the project to fruition. The international dollar lenders and Thai commercial banks, as well as the project company, the Nam Theun 2 Power Company Limited (NTPC), see World Bank Group involvement as essential, not only because of its ability to provide comfort to various private par- ticipants in the project through guarantees, but also to ensure that the potential adverse social and environmental impacts of the project are fully addressed. In this respect, the N T 2 project pro- vides a model o f public-private partnership and the leveragingof IDA financing. A.4 Controversial Aspects, Bank Response andProgress 16. The NT2 project has been controversial in many quarters. Many factors have contrib- uted to this. NT2 i s a large project in a small and poor country. Lao PDR has relatively weak country capacity and a weak track record on governance. There has been concern over lack o f voice and participation in previous hydropower projects in the country. The level of transparency and accountability for both management of public expenditure and environmental and social im- pacts has been low. External to Lao PDR, there continues to be a regional and global debate about the role of dams in development. 17. Anticipating the high level of public debate theproject would generate and recognizing its inherent complexity, the Bank developed a Decision Framework for NT2 that would ex- plore the issues and help design risk mitigation measures. The Decision Framework was agreed with the GOL in August 2001, was brought to the notice of the Bank's Board during the presen- tation of the Lao PDR Financial Management Adjustment Credit (FMAC) project in June 2002, and was made public in July 2002. The Decision Framework recognized that the development impact of NT2 will be determined not only by the quality o f project design and implementation, but also by the extent to which the policy and institutional framework in place is able to ensure effective use of the revenues generated by the project. The Decision Framework also recognized that mobilization of broad support for the project, among key stakeholders in Lao PDR and abroad, would be critical if NT2 were to play a constructive role as a driver of reform. In this context, the Decision Framework stated that adequate progress should be made in three critical areas before a Bank decision on support to the proposed project could be considered: (i) imple- menting a development policy framework characterized by concrete performance that aims at poverty reduction and environmental protection; (ii) ensuring that the technical, economic and financial aspects of the project and the design and implementation of safeguard policies are of highstandard acceptable to the Bank; and (iii) obtaining broad support from international donors and civil society for the country's development strategy and the NT2 project itself. (A copy of the Decision Framework i s attached to Annex 3.) 7 18. Progress has been made on designing and implementingthe developmentpolicy frame- work. The NGPES lays out the GOL's development vision to 2020 and builds on the reform pro- gram already underway. It commits the GOL to continued reforms in the areas of macroeco- nomic management, public expenditure management, debt management, forestry management, state-enterprise reform, financial sector reform, private sector development, international and regional integration, as well as improved delivery of public social services and targeted poverty reduction, The GOL already envisages implementation of future specific measures in some of these areas and is actively formulating measures in several others. 19. Implementation of GOL's reform program has continued, although its pace has been slower, at times, than originally expected. However, momentum has picked up in the last three years since the decision framework on NT2 was agreed. The Bank's Financial Management Ad- justment Credit (FMAC) supported the design and early implementation of reforms in respect o f public expenditure management, state-owned enterprises, and banking. N T 2 has given additional impetus to the reform program and to the Government's commitment to its implementation, as set forth in its Letter of Implementation Policy 20. I n part as a result of the economicpolicy changes reinforced by the NGPES, recent economicperformance has been positive. Between 2001 and 2004 real GDP growth has aver- aged a robust 5.6 percent a year. The exchange rate has been flexible and relatively stable, and inflation, especially non-food prices, has slowly begun to decline, helped by better aggregate fis- cal control. In 2004, real GDP grew at 6 percent, as a result of higher private and public invest- ment, a recovery in tourism and robust export performance. Assuming continued inflows of for- eign assistance, the balance-of-payments should not experience major problems. Exports are performing strongly and the current account deficit remains at around 6 percent. 21. Lao PDR will be under the Fund's surveillance after the Poverty Reduction and Growth Facility (PRGF)expires in April 2005. The I M F ' s November 2004 Article IV Consulta- tion, reported robust medium-term prospects and low inflation in the single digits. As mitigation measures to short-term risks (budget and safeguard actions for the Bank of Lao PDR and several other structural measures), however, were unlikely to be accomplished within the timeframe of the PRGF, it i s anticipated that the PRGF will expire in April. The GOL, World Bank, and IMF will continue their close collaboration on monitoring macro-economic issues as laid out in the CAS andPRSC. 22. A more detailed assessment of progress in implementing the development policy frame- work, as well as the macroeconomic situation in Lao PDR and the status of structural reforms supported by the Bank and the IMF,i s provided in the report circulated to the Board for its con- sideration of the Poverty Reduction Support Credit (PRSC). A Letter of Development Policy has been submitted by the G O L as part of the PRSC package that would serve to reiterate the GOL's commitment to reform measures. Progress inensuring project technical quality and providing for satisfactory implementation of safeguard issues, together with the status of support for and con- sultations on the project, are reviewed briefly below, and assessed in detail later in this Project Appraisal Document. Government Letter of Implementation Policy, March7,2005, which i s found in Annex 1. 8 23. The technical, economic, financial, environmental and social aspects of the project have been the subject of intense due diligence. The project has been underpinned b y an un- precedented level of analytical work as acknowledged by most stakeholders and re-affirmed by expert panels, including the Panel of Environmental and Social Experts (POE) and the Interna- tional Advisory Group (IAG). The inventory o f analytical work has been made available on the project website and disclosure of documentation has fully complied with Bank policies. Techni- cally, the hydropower aspects of the project do not raise unusual or complex issues. Detailed re- views of the Thai electricity market and related economic analysis have also been conducted to ascertain the resilience of power demand forecasts. Project procurement has been studied in depth and meets the Bank's guidelines of economy and efficiency for guarantee operations; the project costs are reasonable. The lessons of Bank andADB involvement inpast hydropower pro- jects in Lao PDR, Thailand and elsewhere have been incorporated in project design. Safeguard measures have been designed after extensive analysis o f the social and environmental impacts likely to be caused by the project, and implementation arrangements have been developedin suf- ficient detail and to Bank standards. The resettlement of residents, livelihood restoration, and wildlife management programs on the Nakai Plateau; protection of the N T 2 Watershed (formed by the Nakai Nam Theun National Protected Area (NNTNPA) and the corridors linkingit to two adjoining national protected areas); and the mitigation of downstream impacts along the Xe Bang Fai and Nam Theun rivers resulting from the inter-basin transfer o f water have all received spe- cial attention during project preparation andbeen the subject of extensive field-based review. 24. Consultations have been extensive and fruitful. The GOL, NTPC, the Bank and ADB have engaged with civil society in an extensive process of local consultations, covering affected populations in all project areas. This process started in the early stage of project preparation in the mid-1990s and was intensified during 2004 and 2005. Consultations have sought to promote open discussion of project impacts, proposed mitigatiordcompensation measures and stake- holders' concerns, and have led to changes inproject design, such as the selection of resettlement sites, and the introduction of engineering structures and operating procedures to avoid excessive variation in water volumes and to improve water quality in the downstream area. The key issues raised by project-affected persons (PAP) relate to the expected impacts and the effectiveness of the mitigation/compensation programs proposed, and have led to changes in project design in features such as location of resettlement sites and the menu of livelihoods programs. Project im- plementation arrangements will use participatory planning methods and provide for continuing consultations throughout the construction and initial operation period. 25. There have also been extensive discussions with international stakeholders. Interna- tional donors have been extensively consulted throughout the preparation process, including through a special meeting of the GOL led, UNDP-supported Round Table Mechanism. A num- ber of multilateral and bilateral donors are co-financing the project and many others have visited the project site and followed closely the preparation process. International adv.ocacy groups have been cautious, and in some cases, hostile, with respect to the project. Some development and conservation nongovernmental organizations (NGOs) support the concept of usingthe project to promote poverty reduction and biodiversity conservation. Issues raised during these discussions related mainly to: (i)governance, with the focus on management of revenues generated from the project; (ii) economics, including Thai power market demand; (iii) project environmental and social impacts and the need for reliable upfront assessment and monitoring throughout project implementation; (iv) transparency, leading to strong interest in disclosure of the information con- 9 tained in the Concession Agreement (CA) and the Power Purchase Agreement (PPA); and (v) humanrights, including the ability to conduct meaningful and open consultations about the pro- ject in Lao PDR. Several stakeholders appreciated efforts to promote a better understanding of the project and to respond to stakeholder concerns through a series of international workshops held inthe Fall o f 2004 in Bangkok, Tokyo, Paris and Washington, D.C. 26. The Government's continued commitment to theprinciples of the Decision Framework during project implementation is embodied in the GLZP. The GLIP asserts Government com- mitment to: (i) continue to implement a viable development policy framework and programs for poverty reduction and for social development and environmental protection, using the NGPES and the National Social and Economic Development Plans and other instruments as drivers; (ii) oneffectiveimplementationofthe technical, financial andeconomic aspectsofthe focus project, as well as of the environmental and social safeguards activities; and (iii)further strengthen support from the international donor community and global and local civil society for poverty reduction programs and associated development plans, and facilitate their involvement during the implementation of the NT2 project itself. The GLIP also describes in detail risk miti- gation activities in three critical areas: revenue management; environmental and social safe- guards; and monitoring and evaluation. B. PROJECTDESCRIPTION B.1 ProjectDevelopmentObjective 27. The project development objective (PDO) is to generate revenues, through environmen- tally and socially sustainable development o f NT2's hydropower potential, which will be used to finance priority poverty reduction and environmental management programs. The use of NT2 revenues for these purposes was envisioned inthe Decision Framework agreed between the GOL and the Bank in2001 andreiteratedinthe GLIP in 2005. 28. To support the PDO, the Bank Group i s proposing to use three instruments amounting to as much as US$270 million to support the NT2 project: a US$20 million IDA grant (the Nam Theun 2 Social andEnvironment Project - NTSEP) to provide a portion of GOL equity inNTPC to be used for management of social and environment impacts and independent monitoring and evaluation of the NT2 project; an IDA partial risk guarantee (of up to US$50 million) for a syn- dicated commercial loan to NTPC; and MIGA guarantees (of up to US$200 million) for a syndi- cated commercial loan to and an equity investment in NTPC covering political risks in Thailand andLao PDR. B.2 ProjectComponents 29. The proposed NT2 project consists o f three components supported by the World Bank Group: (i) a hydropower facility with an installed capacity of 1,070 megawatts (MW), providing 995 MW of power for export to Thailand and an additional 75 MW for domestic use; (ii) man- agement of the project's environmental and social impacts on the Nakai Plateau, in the N T 2 Wa- tershed and in the downstream areas of the Nam Theun (NT) and Xe Bang Fai (XBF) rivers; and (iii)monitoring and evaluation arrangements designed to meet sound engineering practices, fidu- ciary responsibilities and the respective oversight requirements of the participating financial in- stitutions in a timely and cost-effective manner. While not a part of the project per se, detailed revenue management arrangements have also been agreed to ensure that the Government reve- 10 nues from the project will be allocated to priority expenditure programs for poverty reduction and environmental conservatiodmanagement (see Section B.4). 30. Component1: NT2 Hydropower Facility. The NT2 hydropower facility comprises a dam 48 meters high and a 450 km2reservoir on the Nam Theun River and the Nakai Plateau. Water from the reservoir would be transferred to an above-ground power station located at the foot of the Nakai escarpment (a drop of about 350 meters) through an underground shaft, from where it would be discharged into a regulating pond and a 27 km downstream channel, and then into the XBF. The project would include a 130km, double circuit 500 kV transmission line to the Thai border and about 70 k m s of 115 kV transmission line and 22 kV connections to the regional Lao PDR grid (see Figure 1).A detailedproject descriptioni s includedinAnnex 6. A map of the pro- ject area i s provided inthe Maps section of this document. Figure 1: SchematicDiagramof the NT2Hydropower Facility 31. Component 2: Management of Environmental and Social Impacts'. Four areas are im- pacted to different degrees b y the project: (i) Nakai Plateau where most of the resettlement the will occur; (ii) the NT2 Watershed; (iii) downstream area along the XBF River and its tribu- the taries; and (iv) the downstream area along the lower NT River and its tributaries. The proposed environmental and social mitigation measures are summarized in Annex 12. NTSEP funding would supplement the resources otherwise provided b y the project in support of the following activities: 0 Social Development. Implementing the Social Development Plan (SDP), covering: design and construction of resettlement villages for project-affected persons relocating away from the inundation zone; provision of basic infrastructure and social services for PAPs on the Nakai Plateau; design and delivery of livelihood programs, including technical assistance for PAPs; design and implementation o f measures necessary to restore and enhance house- hold income in accordance with agreed targets for PAPs on the Nakai Plateau; design and The sub-components described herein are specified as Parts B, C, and D in the Development Grant Agreement and the NTSEP Project Agreement. 11 implementation of livelihood compensation and mitigation measures in the downstream ar- eas; disclosure of information and timely consultation with all PAPs; promotion of partici- pation o f PAPs in the design and implementation of all mitigation and compensation pro- grams; and implementation of technical assistance to strengthen the capacity of the GOL's Resettlement Committee (RC), Resettlement Management Unit (RMU), District Working Groups andVillage Resettlement Committees. e Environmental Management. Implementing the Environmental Assessment and Manage- mentPlan (EAMP)including: environmental mitigation measures on the Nakai Plateau and inthe downstream areas; design and implementationof adaptive wildlife management pro- grams on the Nakai Plateau; water quality monitoring and management programs in the reservoir and the downstream areas; flood control measures in the downstream areas; im- plementation of the riparian release measures; supervision and monitoring of the Head Construction Contractor Environmental Mitigation and Monitoring Plan (HCCEMMP) and site-specific environmental management plans; and technical assistance to strengthen the capacity of the GOL's Environmental Management Unit (EMU). e Watershed Management. Implementing the Social and Environment Management Frame- work andFirst Operational Plan (SEMFOP) for the N T 2 Watershed, including: preparation and implementation of land use plans in a participatory manner in the Watershed; design and implementation of programs to prevent loss of forest cover, wildlife trade and non- sustainable resource use; compensation for livelihood impacts due to resource access re- strictions; design and delivery of sustainable livelihood alternatives for the population of enclave villages; facilitation of the development of alternative livelihoods for people living inthe peripheral impact zones outside the NNTNPA who currently use its resources; tech- nical assistance to strengthen the capacity of the Watershed Management and Protection Agency (WMPA), covering land use planning, conservation program development, moni- toring and enforcement; and preparation of a detailed operational plan for the second phase. 32. Component 3: Monitoring and Evaluation. The monitoring and evaluation (M&E) framework for the project consists of five complementary components: (i) supervision of physi- cal implementation of the hydropower project by professional engineering firms under contract to NTPC and the GOL, respectively; (ii) independent review of key project components - dam safety and environment and social impacts - by independent professional experts through the Dam Safety Review Panel (DSRP) and the POE (both mandated by the Bank's safeguard poli- cies); (iii)systematic monitoring of the technical and environmental and social safeguards com- ponents of the project during construction and operation by a professional firm on behalf of all o f the private and public sector financial institutions; (iv) an IAG to advise the World Bank's Presi- dent and senior management on implementation of the project, including NT2 revenue manage- ment arrangements; and (v) supervision by staff of the World Bank, other IFIs and bilateral agencies. The first three elements would be financed by NTPC and would be a cost of the project (NTSEP would supplement other project resources to fund the DSRP and POE); the last two would be financed b y the Bank, other I F I s and bilateral agencies. Details of the monitoring and evaluation arrangements are included inAnnex 5B. 33. Linked Projects. The project includes the 500 kV transmission line from the powerhouse to the Thai border. However, the delivery of power from NT2 to the consumers requires two 12 other transmission lines, not being financed under the project: (i)500 kV transmission line, to a be constructed and financed by the Electricity Generating Authority of Thailand (EGAT) con- temporaneously with NT2, to transport NT2 power from the Lao border into Thailand; and (ii) kVpowerlinesfromThakektoMahaxaiandfromMahaxaitoXePon(recently com- 115 pleted) to transmit power from NT2 to the Xe Pon Gold Mine and the Lao CR-2 grid.' Due dili- gence on the Thai transmission line was done by the Bank and ADB through field visits and meetings with EGAT and the Ministry of Natural Resources and the Environment of Thailand. The Bank reviewed the Initial Environmental Examination undertaken by Lang Xang Minerals Limited (Lao PDR), the owner of the Xe Ponmine for the recently completed Thakek - Mahaxai -XePontransmission lines.Noissuesofconcernwereidentifiedineithercase. 34. Complementary Projects. A number of Bank projects will complement NT2. The Lao Environment and Social Project (LEnS) would support: the design and implementation of envi- ronmental and social safeguard policies and management programs in the hydropower and other infrastructure sectors; biodiversity conservation efforts in five protected areas in Central Lao PDR; river basin management efforts by the GOL within LaoPDR and in the broader Mekong region; public awareness raising; and institutional capacity building at the provincial and national levels. The Khammouane Rural Livelihoods Project would enhance broader development oppor- tunities for villages and communities living in the province where the NT2 project i s located. Both projects are intended to avoid NT2 becoming an enclave project, by extending some of the standards and programs established for the NT2 project beyond the project area. A number of complementary operations, ongoing or soon to be delivered, support the strengthening of public expenditure management - the PRSCs, the Financial Management Capacity Building Credit (FMCBC), and an expenditure management TA project. A second rural electrification project will support expansion of rural electrification and strengthening of EDL. ADB i s also preparing projects in the NT2 project area and complementary to NT2's broader development objectives. These include an Environmental and Social Program Loan which supports reforms in resettle- ment, environmental assessment and the establishment of a national environment fund. Other projects financed by the Bank and ADB affecting project areas include health care, rural electri- fication, agricultural development and forestry projects. B.3 Project Beneficiaries, Impacted Groups, and Key Project Indicators 35. Project Beneficiaries and Impacted Groups. The main beneficiaries of the project would be: (i) a portion of the 70 percent of the Lao population who live on less than US$2 per day, 80 percent of whom are living in rural areas, through priority programs for poverty reduction and environmental conservatiodmanagement, which will receive additional financing from revenues from NT2; and (ii) electricity consumers inThailand and Lao PDR, through the availability of an incremental supply of least-cost electricity. The project would also monetarily benefit the project shareholders (including the GOL). In addition, to compensate for habitat loss, the project spon- sors have committed to providing long-term financial support for the management and protection o f the NT2 Watershed, a 395,000 hectare area comprising the NNTNPA and the adjoining corri- dors linking it to two other NPAs - in total, an area amounting to about nine times the area needed for creation of the reservoir. Given the recognition of the NNTNPA as an area o f regional and global biodiversity significance, benefits potentially accrue to a far larger population. The mine pre-dates the project and its operation does not significantly depend on energy from NT2. 13 36. The project will displace approximately 6,200 people living on the Nakai Plateau in the area where the N T 2 reservoir will be formed. They will be resettled to villages along the edge of the reservoir, in accordance to their preferences, as expressed in consultations during the prepa- ration stage, Inaddition to compensating for lost assets andproviding infrastructure and services, NTPC has committed to a livelihood restoration and enhancement program, which proposes to raise household income, averaging around US$450 in 1998, to the national poverty level (US$800 in 2002) in year 5 after relocation and to the average national rural income level (US$1,200 in 2002) in year 9. Fulfillment of the first target i s a requirement of the CA; on the second both NTPC and GOL are committed to a "best effort" approach, including the latter pro- viding additional funding by usingNT2 revenues, if needed. These commitments are reflected in the CA. 37. In the NT2 Watershed, the livelihoods of about 5,800 residents will be potentially af- fected as a result of land use changes and restrictions of access to natural resources on which they depend. The project foresees a participatory planning process to define land uses and activi- ties compatible with watershed conservation, taking into account development needs and aspira- tions of residents. Communities will participate in programs designed to enhance sustainable land and resource use, improve livelihoods and promote access to education and health services. 38. In the downstream areas, there are estimated to be approximately 70,000 persons living along the mainstreamof the XBF and its tributaries, and a few thousand who fish in tributaries of the Nam Theun, who would be affected b y the environmental and social impacts caused by the inter-basin transfer of water under the project. Although limited physical displacement (about 90 households) would be required, the changes in the flow regime foreseen on these two river sys- tems and the consequent reduction of fisheries are likely to have a significant impact on liveli- hoods. Mitigatiodcompensation programs have been agreed to ensure that the livelihoods of pro- ject-affected persons in these downstream areas are fully restored b y year 9 of project implementation. Furthermore, GOL has requested support from IDA for a complementary Khammouane rural livelihoods project (paragraph 34) to, among other things, enhance economic prospects for inhabitants of the XBF region, exploring the irrigation potential that will become available as a result of the increase inthe flow of the XBF, andbringingadditional, broader indi- rect benefits to NT2 PAPs. 39. Project Indicators. Monitoring indicators cover technical implementation of the project, mitigation of environmental and social impacts, and application of project-related revenues to agreed priority programs for poverty reduction and environmental conservatiodmanagement, with indicators selected to track the costs and benefits accruing to the principal categories of per- sons benefiting andor impacted b y the project (see Annex 5). These would include indicators to measure: (i) completion o f the physical works against time and budget targets, and achievement of energy sales and revenue targets; (ii) progress in the physical components of the resettlement program on the Nakai Plateau and in the downstream areas; (iii) success of the livelihood options inreaching the proposedincome restoration and enhancement targets for PAPs on the plateau by the dates stipulated in the CA, and income restoration targets inthe downstream areas; (iv) insti- tutional development and effectiveness of the programs of the WMPA to conserve the NT2 Wa- tershed and improve livelihoods of the watershed inhabitants; and (v) efforts to mitigate or com- pensate for impacts on water quality, fisheries, agriculture and physical assets in the downstream areas. Finally, indicators will assess: progress in implementing the public expenditure manage- ment reform program; compliance with allocation, additionality and reporting requirements for 14 NT2 revenues and expenditures; and the impact of incremental expenditures, particularly with regardto improvements in service delivery for the poor. B.4 NT2RevenueandExpenditureManagement 40. Since the Bank's involvement in the project i s predicated on the GOL's commitment to apply project revenues to increased expenditures on priority programs for poverty reduction and environmental conservatiordmanagement, it i s critical that there i s agreement on the appropriate use of NT2 revenues and on the development of an effective, transparent public expenditure management system. Because of their central importance to the successful accomplishment of the project, the N T 2 revenue arrangements and public expenditure management issues are de- scribed in the following paragraphs. They are addressed in greater detail in Annex 17 and in Technical Annex 1to the GLP (Annex 1of this PAD). 41. Expenditure Management Challenges. The 2002 Public Expenditure Review and Coun- try Financial Accountability Assessment identified serious weaknesses inLao PDR's systems for budget preparation, budget execution and control." Some progress has been made in recent years, notably in relation to publication of more detailed budget books, computerization of some treasury and accounting functions, and approval of a new procurement decree and internal regu- lations. Nevertheless, Lao PDR still does not meet any of the HIPC public expenditure manage- ment benchmarks. Despite recent revisions to the budget classifications and chart of accounts, it i s difficult to link resources to specific functions and programs. Budgeting i s largely incremental, making it difficult to accommodate phased adjustments in the structure of expenditure. Effective treasury operations and cash management are hampered by revenue retention at the provincial level, lack of systematic commitment controls and weak cash planning mechanisms. Although the budget books include budget execution data, the administration does not publishconsolidated end-of-year financial statements or in-year budget execution reports. The State Audit Organiza- tion (SAO) undertakes limited compliance audits of a few line agencies. Audit reports are not published. 42. Resource AZlocation Challenges. Since FY2001, following the successful conclusion of the fiscal stabilization program launched in late 1999, the Government has made progress in shiftingresources in line with the Government's development and poverty reduction objectives. The share of total spending (excluding debt service) allocated to the education and health sectors increased from 13 percent in FY2001 to 18 percent in the FY2004 budget. However, this increase was largely due to increases in the share of externally financed capital expenditures: allocations to education and health have remained at around 14 percent of domestically financed expenditures. Furthermore, health and education expenditures in real per capita terms still fall short of the levels seen in the mid-1990s and are well below regional comparators at just 1 and 1.9 percent of GDP, respectively. In the economic sectors, allocations to agriculture fell sharply from FY2001andFY2004 as the Government cut back on large irrigation schemes, while alloca- tions of domestically financed expenditures to the roads sector have increased steadily. About one half of domestically financed expenditures are allocated to public administration (including security and the justice sector), with the share of these sectors rising slightly in recent years, lo Lao PDR, Public Expenditure Review and Country Financial Accountability Assessment, Report 24443-LA, Joint Reportof WorldBank, InternationalMonetaryFundand Asian DevelopmentBank, June 28 2002. 15 partly driven by increases in personnel costs. There has been a marked shift in domestically fi- nanced expenditures from capital to recurrent spending, with recurrent spending increasing from just 53 percent of domestically financed expenditures in FY2001 to 65 percent in the FY2004 budget. Nevertheless, operating and maintenance expenditures are still under-funded and civil service pay i s still significantly below the levels of the mid-1990s inreal terms. It i s clear that the pace at which the Government can increase spending on NGPES sectors, recurrent expenditures andpay reform will be determined by improvements inrevenue performance. 43. Inthis context, NT2 revenue management measures can play an important role as one of a number o f policy and administrative measures intended to mobilize the domestic resources needed to finance Lao PDR's poverty reduction and development strategy and to energize re- forms to improve the efficiency of public expenditure management. 44. NT2 Fiscal Impacts. Revenues from the NT2 project, comprising payments under the CA, water resource user charges, and NTPC dividends and taxes, are expected to become avail- able in FY2010. Estimated NT2 revenues to GOL rise gradually in the early years, averaging about US$30 million (nominal) per year during the first ten years while commercial debt service i s paid, then rising sharply thereafter to an average of approximately US$110 million (nominal) from 2020 to 2034. On the basis of economic and revenue growth projections used for the recent Debt Sustainability Analysis carried out by the Bank, IMF and ADB, estimated N T 2 revenues will account for between 3 to 5 percent of total revenues in the period to FY2020. Though this revenue stream i s relatively modest, NT2revenues can have a significant impact on expenditures if well targeted. Estimated NT2 revenues in 2011, adjusted to FY2003 prices, are equivalent to 60 percent of domestically financed expenditures on education and health inFY2003. If the NT2 revenues were allocated to a wider range of NGPES priority sectors, they would still have an ap- preciable impact: NT2 revenues in 2011, at FY2003 prices, would be equivalent to about 19 per- cent of domestically financed expenditures on health, education, agriculture, transport and com- munications. The impact of NT2 revenues in terms of additional expenditure for narrowly targeted programs would be significantly higher than the broad sector comparators suggest. 45. Approach to NT2 Revenue and Expenditure Management.Particular emphasis needs to be put on aligning public expenditures with the development and poverty reduction goals set forth in the NGPES. The Government and the World Bank consider the development o f effec- tive, transparent and accountable systems for the management of all public expenditures a critical development priority for Lao PDR. Progress in this area will be essential if Lao PDR i s to achieve the ambitious development and poverty reduction goals laid out in the NGPES and to use NT2 revenues transparently and effectively in line with the allocational objectives agreed in the NT2 Decision Framework. The Government has recently approved a Public Expenditure Management Strengthening Program (PEMSP) which lays out its reform and capacity building strategy for the five-year period from FY2005 to FY2009. Significant progress towards interna- tional benchmarks for public expenditure management can be made in this period. At the same time, the Government has approved specific NT2 revenue and expenditure management ar- rangements, intended to provide additional assurance that NT2 revenues will be used to finance incremental expenditures on poverty reduction and environmental management programs and meet adequate standards of transparency from the expected commercial operations date (COD) of 2009. 16 46. Strengthening GovernmentSystems.The PEMSP lays out broad objectives and intended outcomes of the Government's reform strategy, including indicators to monitor improvements in system performance and a realistic implementation schedule. The program covers the key ex- penditure management functions: fiscal planning and budget preparation, treasury, accounting and reporting, the development of information systems and the legislative framework for public expenditure management. A sequence of PRSCs, from 2005 through 2007, i s designed in part to support the implementation of PEMSP, with a number of PRSC prior actions linked to imple- mentation of key reforms scheduled under the PEMSP. The World Bank's ongoing FMCBC will fund technical assistance inputs pending the mobilization of grant financing. To facilitate PEMSP implementation, the Government has approved the hiringof two long-term advisors. The PEMSP will also integrate assistance from several on-going and planned assistance programs, including World Bank Institutional Development Fund grants, ADB technical assistance, and grants and projects financed by AFD and the United Nations Development Programme (UNDP). Alongside the PEMSP, the SA0 has recently approved a strategic plan for FY200.5 to FY2009 which anticipates audits of the consolidated financial statements of government by FY2009. Support to the S A 0 will be provided, in part, through audit peer reviews by a partner institution from the International Organization of Supreme Audit Institutions (INTOSAI), which will pro- vide guidance on progress towards international standards. Peer reviews are scheduled for FY2006 andFY2009. The World Bank will also support improvements in financial management through its portfolio o f sector projects. Projects recently approved or in the pipeline in education, health and roads, and the Poverty Reduction Fund, include components geared to the develop- ment of agency financial management systems, particularly systems designed to channel re- sources close to the field level, as well as the formulation of sector level expenditure policies, 47. Specific NT2 Revenue and Expenditure Management Arrangements. The Government has agreed to specific NT2 revenue and expenditure management arrangements, consistent with the broader reform strategy, which will provide assurance that NT2 revenues will be applied in line with allocation and transparency objectives from the time of project commissioning. These arrangements have been designed within the framework of the Budget Law, which mandates a consolidated state budget, and are guided by principles of soundpublic expenditure management. They have also had to take into account the need for allocational flexibility, given that develop- ment policies and needs are likely to change before and after COD in 2009. The arrangements build on and accelerate system-wide reforms under the PEMSP by focusing attention on a few high priority programs benefiting from NT2 revenues. Key elements of these arrangements in- clude: 0 Identification of eligible programs to benefit from NT2 revenues, based on policy priorities laid out in the NGPES and its successors, and selection criteria which include requirements for adequate financial reporting and stakeholder consultation; 0 Channeling revenues through a Treasury "NT2 Revenue Account," so that the transfer of revenues to the central treasury account can be verified and the Ministry of Finance can withhold funds from programs ifthey fail to meet transparency standards and eligibility cri- teria; 0 Publication of budget execution reports, financial statements, summaries of internal audit reports, and audits of the eligible programs; and 17 0 Implementation of Public Expenditure Tracking Surveys and Public Expenditure Reviews in collaboration with NT2 financing partners to assess the control environment and impact of incremental expenditures on program performance and poverty reduction outcomes, to- gether with annual reporting on the implementation of the revenue and expenditure man- agement arrangements and consultations with NT2 partners. 48. The Government has identified five indicative eligible programs based on NGPES priori- ties: basic education; basic health care; rural roads; local development initiatives identified through participatory planning; and environmental management programs. Three of these pro- grams may be implemented, in part, through statutory funds - the Road Maintenance Fund, the Poverty Reduction Fundand the forthcoming Lao Environment and Conservation Fund- which offer additional fiduciary safeguards in terms of financial reporting and oversight arrangements. Other expenditure programs with adequate financial arrangements will be developed as the PEMSP i s implemented between now and project operation. The list o f eligible programs to benefit from NT2 revenues may be adjusted, with new programs that meet the eligibility criteria added to the list and others removed from the list, in order to ensure that resource allocations are consistent with the Government's evolving policy priorities. B.5 ProjectCostandFinancing 49. Project Cost. The estimated base cost of the project i s US$1,250 million, as shown in greater detail in Table 1below. Of this amount, about US$1,201 million i s the cost of the hydro- power component comprising: (i)the Head Construction Contract (HCC) (US$722 million equivalent); (ii)financing charges (US$249 million); and (iii) development and various pre- operating costs (US$230 million). The balance of about US$49 million i s the capital budget to be spent on environmental and social impact mitigation during the construction period. The base project cost includes pre-funded contingencies of about US$34 million. These costs include pro- vision for clearance of unexplodedordinance at the project site and the resettlement areas. In ad- dition, the project has a provision for US$200 million of any delay-relatedcontingencies. Table 1:ProjectCosts(US$ millions) ____ ~ _ _ _ _ Cost Category US$ Million THBMillion TOTAL US$millionEquivalent (@ THB 40: 1 US$) DevelopmentCosts 72.2 80.0 74.2 Environmental/ Social Costs 48.8 48.8 GOL Contribution 29.2 29.2 O&M Re-OperatingExpenses 10.7 68.5 12.4 NTPC General& Administrative 29.6 161.4 33.6 Bonding/ Financing cost 17.1 17.1 Insurance 13.1 13.1 Contingencies 21.0 516.0 33.9 Working Capital 6.0 252.5 12.3 GOL Works 3.0 3.0 TotalPre-Operating 250.5 1,078.4 277.5 HeadConstruction Contract/ NTPCWorks 401.0 12,846.5 722.2 Total Costs (exc. 1DC) 651.6 13,924.9 999.7 IDC and other costs 143.5 4,275.5 250.3 Total Base Costs 795.5 18,179.6 1,250.0 Total Contingent Costs 116.6 3,335.1 200.0 TOTAL COSTS 912.1 21,514.8 18 50. NTPC has budgeted US$90.5 million'' for environmental and social impact mitiga- tiordcompensation program, of which US$45.8 million will be incurred during the construction phase and have been financed as capital costs; the remaining US$44.7 million will be funded out of revenues over the 25-year operating period (see Table 2). Over and above the US$90.5 million amount, NTPC has budgeted US$5.1 million for external monitoring (POE, DSRP and Lenders' Technical Advisor), of which US$3.0 million will be incurred during the construction phase and have been financed as capital costs. In addition, environmental mitigation measures have been incorporated within the project's technical design (for a regulating pond, river bank protection, aeration weirs and other measures) and these represent an additional capital cost of approxi- mately US$60 million. Table 2: Environmentaland Social Costs and Fundi g (US$ millions) Program BeforeCOD After COD Total NTSEP (2004-2009) (2009-2034) US$ Contribution Environmental Management (EAMP) 2.9 0.9 3.8 2 Social Development-Plateau (SDP) 28.4 10.8 39.2 14 Social Development-Downstream Areas (SDP) 8.0 8.0 16.0 0 Watershed Management (SEMFOP) 6.5 25.0 31.5 3.O Total Environmentaland Social (E&S) measures 45.8 44.7 90.5 E&S extemal monitoring: Panelof Experts, Dam Safety Review Panel, Lenders' Technical Advisor 3.0 2.1 5.1 (E&S component) 1.o Grand Total 48.8 46.8 95.6 20.0 51. Project Financing. The base project cost i s being funded 28 percent by equity (US$350 million) and 72 percent by debt (US$900 million). The additional US$200 million of contingent costs are being financed 50 percent by equity and 50 percent by debt, on apair passu basis. Pro- ject equity i s being provided by the four shareholders of NTPC (Electricit6 de France Interna- tional (EDFI), Italian-Thai Development Public Company Limited (ITD, Thailand), Electricity Generating Public Company Limited (EGCO, Thailand) and Lao Holding State Enterprise (LHSE), a newly created state enterprise to hold the Government's equity inNTPC. 52. GOL's base equity (totaling US$87.5 million) will be funded by: (i) an IDA grant of US$20 million equivalent (see discussion below); (ii) an Agence Franqaise de DCveloppement (AFD) grant of Euro5 million (about US$6.2 million); (iii) European Investment Bank (EIB) an loan of about Euro40 million (of which about US$41 million would be applied to base equity after deducting interest during construction (IDC)); and (iv) an Asian Development Bank (ADB) loan of about US$20 million (of which about US$12.5 million to be applied towards base equity and about US$5 million to be applied toward contingent equity, after deducting IDC).12 Remain- ing base equity needs of US$7.8 million will be funded by the "GOL Contribution" provided by NTPC to GOL. l3 GOL's contingent equity requirement of US$25 million i s proposed to be I' NTPC i s also providing a Letter of Credit of US$10millionfor unanticipated impacts. Subject to final allocation of loan proceeds. l3 The Concession Agreement provides for a payment of US$30 million from NTPC to the GOL to reimburse GOL for its development expenses, loss of biodiversity, and in consideration for the grant of the concessionto the company. About US$SOO,OOO has already been advanced by the company and the remaining US$29.2 mil- lion is expectedto be usedfor GOL equity contributions. 19 funded by ADB (up to US$ 5 million) and by setting aside US$20 million from the GOL Contri- bution. 53. NTPC has secured US$l,OOO million of debt financing for the project. The following in- stitutions will provide loans to NTPC andor guarantees to private lenders to mobilize the debt package for the project: (i) international financial institutions (IFIs), including the World Bank Group (IDA and MIGA), ADB, EIB and Nordic Investment Bank (NIB); (ii) bilateral agencies, such as AFD and Proparco; and (iii) export credit agencies (ECAs), including Compagnie Fran- gaise d'Assurance pour le Commerce ExtCrieur (COFACE, France), Guarantee Institute for Ex- port Credits (GIEK, Norway), Exportkreditnamnden (EKN, Sweden), and Export-Import Bank of Thailand (Thai-Exim); along with a consortium of 14 international private commercial banks -nineinternationaldollarlendersandsevenThailenders. 54. As shown in Table 3, debt guarantees from IDA, MIGA and ADB are expected to sup- port about US$135 million of private financing to the project; loans of about US$135 million from multilaterals (ADB and NIB) and bilaterals (AFD and Proparco) are expected to be pro-' vided to NTPC. In addition, export credit agencies from France, Norway, and Sweden are pro- viding additional extended political risk guarantees to dollar commercial lenders of approxi- mately US$205 million. Finally, Thai-Exim is providing a direct loan of US$25 million to the project. Financedbv: Guaranteedbv: US$ Million Export Credit Agencies COFACE (140.0) EKN (30.0) 205.0 Intemationalcommerciallenders GIEK(35.0) IDA 45.0 ADB 45.0 MIGA *** 45.0 ADB (OCR) 45.0 AFD 30.0 NIB 30.0 Proparco 30.0 Thai-Exim 25.0 Thai commercialbanks (THB financing)* 500.0 Total Long-Term Debt 1000.0 PrivateEquity 332.1 GOL Equity** 112.5 Total Equity - . I 450.0 I TotalBase & Contingent Financing 1450.0 20 55. For a project the size of NT2 located in Lao PDR, support through the use of multilateral guarantees offers the only practical solution: first, there would not be sufficient IF1and bilateral fundingto replace the proposed commercial bank debt requirements of about US$l,OOO million; second, lengthening the maturities through IFIhilateral lending on IBRD terms would not sig- nificantly change the debt service structure or improve the returns to the GOL and other share- holders; third, even if sufficient amounts of IDA-type funds were available, IFIhilateral funding would be on commercial terms because NT2 i s a profitable, private sector-led, income- generating project; and fourth, through guarantees and modest direct lending, the IFIshilaterals are able to use a limited amount of public resources to mobilize over US$1,200 million in limited recourse private funding (shareholders' equity and long-term private commercial bank debt). B.6 Bank Group Instruments 56. The international dollar lenders to the project have indicated to NTPC that without the availability of adequate political risk mitigation, both in Lao PDR and in Thailand, they would not be able to lend to NTPC for the project. Consequently, GOL and NTPChave requested IDA, ADB andMIGA to provide riskmitigation instrumentsto support the international lending pack- age for NTPC. Table 4 describes the allocation of key commercial and political risks among the shareholders o f NTPC and the GOL and the coverage of those risks by IDA and MIGA guaran- tees. Table 4: Allocationof Key Risks Phase Risks/Obligation Project Spon- Lao PDR15 IDA PRG MIGA sors and Pri- Guarantee vate Partici- pantst4 Pre-Construction Project design B Pre-construction works Financing Construction Cost overruns B Construction delays Operation Operation and maintenance Tariffs Transmission Hydrological "B-period" Tariffs Concession Term Thai Baht devaluation B Lao Political force majeurei6 Changes inLao PDR law B Natural force majeure" Lao - Expropriation Thailand Political Force Majeure Thailand - Expropriation ThailandLao PDR Transfer Re- strictions and Inconvertibility 14 Including EGAT as an offtaker; Engineering, Procurement and Construction (EPC) contractors; project lenders and GOL, as a shareholder inNTPC. Some risks may not affect all of the listed parties but only some. 15 Excludes risks taken by GOL as an NTPC shareholder. 21 57. The transaction i s structured as a limited recourse financing and the allocation of risks follows the traditional private project financing approach where the completion risk ultimately rests with the private project company and/or its contractors. The project structure allocates this risk to various parties responsible for specific project activities. For example, the plant construc- tion risk rests with the Head Construction Contractor (HC), which has in turn passed on substan- tial portions of that risk to the five subcontractors under lump sum, fixed price subcontracts. The geological risk i s shared amongst the HC, subcontractors and the company through a target pric- ing mechanism, with the residual risk (which is negligible when compared to the overall project costs) being taken b y the company. In addition to the risks allocated to the subcontractors, EDF as the HC, retains a substantial risk for timely and within budget completion. EDF's aggregate liability as HC to NTPC i s equal to the value of the performance security plus seventy-five per- cent (75 percent) o f the total price of the HC. In the event that the H C i s unable to fulfill its obli- uidated damages o f US$lOO million.Ps gations under terms of the price-cap ed, turnkey contract in a timely manner, it i s liable for liq- 58. Responsibility for the timely completion of the transmission line in Thailand rests with EGAT.The private company and the lenders would take the EGAT risk.The Thai political risks are taken by the private parties. For a portion o f the debt, the Thai political risk i s also backed b y MIGA and ADB guarantees to private international dollar lenders. The risk of delays on account of GOL rest with GOL, which i s being backed by IDA, MIGA and ADB guarantees to private international dollar lenders. In each case, the private parties have provided performance bonds, as required b y lenders, and are liable for liquidated damages which are expected to compensate for any delays andor defects incivil works and/or equipment. 59. IDA Guarantee. The IDA Partial Risk Guarantee (PRG) would mitigate specific risks relating to political, regulatory and governmental performance in Lao PDR under the Project Agreements. Specifically, the PRGwould back any debt service default resulting from activities and actions under GOL's control: expropriation; the issuance and renewal of permits for con- struction and operation; changes in laws, taxes and duties; other specific obligations of a sover- eign nature defined in the C A and other related agreements and deemed critical for obtaining fi- nance; and natural force majeure events that are beyond the control of NTPC and that cannot be insured in the public or private insurance market. 60. The risk coverage under the IDA guarantee to the commercial lenders would mirror that of an IBRD "enclave" guarantee which was originally envisaged to support this project. Consis- tent with the IBRD enclave structure the PRG would only cover Lao sovereign risks as defined in the Project Agreements, and will not cover any Thai sovereign risks (even though the project sells electricity to the Thai utility EGAT and i s subject to the offtake risk arising out o f the EGATPPA). A summary of terms and conditions of the proposedIDA PRGare provided inAn- nex 16. The PRG would be non-accelerable; in case of a call on the guarantee, the outstanding guaranteed loan balance would be paid out as per the underlying loan repayment schedule, and l6 Political force majeure: political violence, war, national and regional strikes, coups d'Ctat, etc. " Natural force majeure: acts of God, earthquakes, fires, typhoons, etc. l8 The required value of the performance security will vary over time from US$ 70 million to US$ 105 million during the construction period. 22 the principal payments would not be accelerated. The IDA PRG would not create any additional liabilities for the Government since it backs the commitments already made b y the Govemment inconnection with the project. 61. Consistent with the fees charged for the last IBRD enclave operation, it i s proposed to charge NTPC a fee of 2.00 percent per annum, of which IDA would be paid 0.75 percent per an- num and GOL would be credited the remaining 1.25 percent per annum as long as there is no debt service default on account of non-fulfillment of GOL obligations. NTPC would also be re- quired to pay a Processing Fee and an Initiation Fee, The policy framework for charging process- ing fees permits that in exceptional cases, IBRD or IDA may wish to recover higher than usual internal costs incurred during the course of preparing very demanding, high priority project fi- nance operations. In view of its extraordinary preparation costs, IDA will charge NTPC a proc- essing fee of US$5 million, to be paid in five equal annual installments beginning at financial close. 62. All of the key project documents between NTPC and GOL have been executed and the financing documentation has been substantially negotiated. The current schedule envisages fi- nancial closure by May 8, 2005. The final IDA Guarantee Agreement and other Project Agree- ments would reflect any changes which may be required based on the financing documents fi- nally negotiated amongst NTPC, the lenders and GOL. 63. MIGA Guarantee and Insurance. MIGA proposes to offer political risk guarantees to international dollar lenders to the project, covering their non-shareholder loans, including interest and interest rate hedging instruments, to NTPC (see Table 5). MIGA proposes to mitigate the risks of expropriation, breach of contract, transfer restriction and war and civil disturbance in Lao PDR. In Thailand, MIGA will cover initially the risks of breach of contract, transfer restric- tion and war and civil disturbance. If the off-taker, EGAT, i s privatized MIGA intends to cancel the breach of contract coverage and replace it with the expropriation cover. Coverage will be for a period up to 20 years in both Thailand and Lao PDR. MIGA further proposes to offer EDF, a company incorporated under the laws of France, guarantees covering a small portion of its equity investment in the project against the risk of transfer restrictions in Lao PDR for up to 20 years. MIGA will guarantee up to 97.5 percent of the non-shareholder loans andup to 90 percent of the equity. These coverages will translate into a gross exposure of up to US$200 million for the pro- ject. After reinsurance, MIGA's net exposure under this project would be up to US$lOO million. Table5: MIGA UnderwritingStructure US$million Term of Contract Transfer Expropriation War & Civil Breachof Restriction Disturbance Contract Equity (Lao Risk) Upto 20 years up to 20.0 Debt (Lao and Thai Risks) Upto 20 years Upto 180.0 Up to 180.0 Upto 180.0 Up to 180.0 Total GuaranteesIssued up to 200.0 Upto 180.0 Up to 180.0 Up to 180.0 -CUP Less 0.0 0.0 0.0 0.0 Total MIGA (gross) up to 200.0 Upto 180.0 Upto 180.0 Up to 180.0 TotalMIGA (net) upto 100.0 upto 90.0 Upto 90.0 Upto 90.0 23 64. IDA Grantfor NTSEP. The proposed IDA grant of US$20 million equivalent will fi- nance a portion o f the project's E&S mitigation costs as part of the GOL's equity. The proposed IDA grant would be disbursed against the E&S costs of the project, as summarized inTable 2. B.7 Lessons Learned and Reflected inProject Design 65. Experience has been drawn from the following: (i) recent hydropower projects in three Lao PDR and Thailand financed b y ADB and the Bank;Ig (ii) infrastructure projects sup- large ported by the Bank including the Chad-Cameroon pipeline, the Lesotho Highlands Water Supply Project, the West African Gas Pipeline Project, and the Bujagali Hydropower Project in Uganda; and (iii) the report of the World Commission on Dams, the report of the Extractive Industries Review, and the recent Worldwide Fund for Nature (WWF) study, "Rivers at Risk: Dams and the Future of Freshwater Ecosystems." Key lessons learned and incorporated in project design are given in Table 6. Table 6: Lessons Learned and Incorporated into Project Design Lessons Learned How Incorporated into Project Design Consider project alterna- Two comprehensive analyses of alternatives have beencarried out (in 1999 and tives and design options and 2004) for different options for power generation inThailand as well as hydro- environmental and social power development inLao PDR for export of power to Thailand. impacts inan integrated These analyses of alternatives also looked at alternative configurations for the manner with the economic project site on the basis of social and environmental impacts (dam and reservoir and technical dimensions of size, the number of persons to beresettled) and technical and economic analysis. the project. Carefully consider down- Downstream impacts in the NamTheun, Nam Kading, Nam Kathang and Xe stream environmental and BangFai drainage areas have been identifiedand quantified. social impacts, collect ade- Operational measuresinclude a provision inthe PPA to terminate power genera- quate baseline data, identify tion during flood periods. Design features include an outlet structure, regulating those directly and indirectly pond, aeration devices and a lined downstream channel to minimize erosion and impactedby the project, improve water quality; and predictable and consistent flows. and create adequate mitiga- Downstream impact analysis inthe NamTheun and XBF rivers. tion and compensation pro- Baseline data has been collected. Long-term studies of fisheries impacts in the grams covering all project XBF and upstream of the NakaiDamwill collect data, through construction. areas, with associated fi- A proactive mitigation-compensation package has beendeveloped with a dedi- nancial commitments, cated budget and contingencies for the resettled population on the Nakai Plateau aheadof construction. and in the downstream areas. Mitigation measures would compensate fisheries impacts, loss of riverbank structures and gardens, and other effects. Project financing includes contingency for cost over-runs, unanticipated impacts, and failure to achieve agreed program targets. Identify, prepare and im- Formal and informal public briefings have taken place throughout project prepa- plement development and ration, including local consultations and international workshops with civil soci- mitigation measures in con- ety. The views expressed have been documented and have informed project de- sultation with project- sign. affected persons. Involve Siting of resettlement villages has reflected the preference o f affected persons. concerned civil society (e.g. change from relocation on the Gnommalath plain to the Nakai Plateau). Vil- The three projects are: (i) Mun (Thailand), partially financed by the World Bank; (ii) Hinboun (Lao Pak Theun PDR) hydropower project for export, financed inpart by ADB; and (iii) NamLeuk (Lao PDR) hydropower pro- ject for domestic and export supply, with ADB financing. 24 Table 6: Lessons Learned and Incorporated into Project Design LessonsLearned How Incorporatedinto ProjectDesign hrough participatory dia- lage layout design has also been changed based on stated preferences. Several en- ogue and be pro-active in gineering features were introduced in the design of the project to mitigate envi- `esponseto issuesraised; ronmental impacts, including a larger regulating pond and aeration structures. )eriodically disseminate D GOL and NTPC have provided considerable project information on their respec- xoject-related information. tive websites to engage civil society indialogue on the project. D Informed and meaningful participation of project-affected persons, and outreach to local populations, will continue throughout implementation. 3learly define the roles of DProject includes establishment and strengthening of GOL institutions for conser- 111entities involved inim- vation, social and environment oversight. The project establishes the NNT dementation; address ca- WMPA, which will be funded by project revenues over a 30 year period. 3acity gaps; develop ade- o Extensive monitoring, including GOL, NTPC, IFIs, bilateral agencies, IAG, pate monitoring DSRP and POE, and independent monitors, is an integral part of the project de- irrangements with suffi- sign. :ient long-term funding for An independent professional firm will monitor key project issuesfor the lenders 111tasks long after project throughout construction and into the operational period, untilthe commercial debt :ompletion. has been fully repaid, a period of about 17 years. Zarefully scrutinize imple- Specialist consultants completed a review of the procurement process and the mentation aspects to mini- structure and cost of contracts, and found them satisfactory. mize the risk of cost and Major contracts would be signed by May 2005. time overruns and inferior Additional reviews carried out by GOL's independent engineer and another inde- 3perational performance; pendent engineer directly to the lenders will help ensure efficient implementation. scrutinize contractor selec- Thorough staff supervision by IFIs and bilateral agencies involved. tion. Qualifications of contractors and key operating personnel have been vetted. Hydrological uncertainties Project preparation has included detailed hydrological modeling, dam safety de- have plagued past hydro sign for the probable maximum flood (PMF), and watershed protection to prevent projects inLao PDR and sedimentation. elsewhere. The PPA shelters NTPC from liquidated damages due to EGAT as a result of XBF flooding and dry years. Active monitoring and timely warning of XBF flooding has been provided. Geological uncertainties, Extensive geological investigations have been carried out; geological risks inthe due to paucity of investiga- water conduits from the reservoir to the power house have been well catalogued tions and terrain rigors, and provisions made inthe contract for design changes. have caused cost and time Power house design has been changed from under- to above-ground at some addi overruns. tional cost. Additional revenues have Public Expenditure Management Strengthening Program provides a framework not been applied in poverty for development of national systems. reduction where governance Revenue management arrangements will target NT2 revenues to eligible priority and expenditure manage- programs inthe GOL's NGPES and its successors. ment systems are weak Mobilization of multi-donor support for PEMSP implementation and linkages to PRSC raise the profile o f public expenditure management reform agenda. 66. Based on these lessons, the following features have been incorporated in the design o f the NT2project: 0 Contractual arrangements to address environmental and social impacts within the CA, in- cludingprovisions for the release of contingencies; 25 Attractive income restoration and enhancement targets for resettlers, with the commitment of the developer, through the CA, to achieve outcomes, even if the cost of livelihoods pro- grams exceeds estimated budgets; A biodiversity conservation program in an area of regional and global significance as an offset for the loss of natural habitat on the Plateau as a result of reservoir formation; A participatory approach to design and implementation of mitigation, compensation and livelihood restoration packages, introducing piloting and feedback mechanisms to enhance effectiveness of the proposedmeasures; An adaptive management approach, with extensive monitoring of conditions and trends, to address environmental impacts which are hardto predict upfront; An unprecedented level of consultation in the preparatory phase, in terms of coverage and in the use of a culturally appropriate approach, and provision for continuing intensive con- sultation duringproject implementation; A cumulative impact assessment (CIA) covering the Mekong River basin, for 5 and 20- year scenarios, considering, the impact of the NT2 project and other developments (such as hydropower, transport and urbanization), as well as a strategic impact assessment (SIA); Revenue management arrangements that use national systems, finance nationally owned development priorities, and support the broader reform effort; and Joint project preparation and approach with ADB and other public financiers, and estab- lishment of a common platform for monitoring and evaluation with all lenders - public and private. B.8 Alternatives Considered 67. A "Study of Alternative Power Generation Options for Lao PDR" by LahmeyerNorley International (1998) carried out a comprehensive multi-criteria analysis of potential hydropower and one lignite-fired project, and examined several alternatives to the development of the NT2 project itself, as sources of power supply for Thailand. The relative weights for economic, finan- cial, environmental and social attributes were selected on the basis of consultation with stake- holders. The study explicitly considered environmental and social trade-offs for alternative power generation options in both Thailand and Lao PDR, and various site configurations includ- ing changing the dam height to reduce the full supply level of the reservoir, moving the dam to different locations such as Ban Signo, providing two reservoirs, developing the project as a run- of-river scheme or as a pumped storage scheme, and providing upstream regulation at the Nam Theun tributaries. Alternative site configurations took into consideration changes to the size of the N T 2 reservoir and in flow patterns in the Xe Bang Fai and the Nam Theun. The environ- mental and social implications of scenarios without the project or no action alternative were also considered. The results of the multi-criteria analysis were discussed in three national workshops inwhich participants rankedthe candidate projects. 68. The NT2 base case emerged as the best project, with the exception o f the Theun Hinboun hydropower project, which was already under construction at the time. Alternative configura- tions were generally inferior to N T 2 from the perspective of higher power generation costs. From 26 a social point o f view, there would have been a slight preference for the Ban Signo site and for the run-of-river solution as these options would have involved somewhat less resettlement but, the unit cost of production would have been far higher. However, in most alternative cases, the incremental reduction of resettlement impacts would have been minimal as potentially affected persons live mostly near the river and would need to be relocated, regardless of the reservoir supply levels. From an environmental perspective, all options featured a dam that would block the river and would have significant impacts on aquatic biodiversity due to changed flows and the inter-basin water transfer. A full discussion of the alternatives considered i s provided in the Chapter 4 of the EAMP. (Annexes 12 and 14 provide further details). 69. The project was originally designed to be a base-load station of about 680 MW. In re- sponse to EGAT system requirements, it was subsequently changed to produce intermediate peaking power with a capacity of 1,070 MW, requiring an increase in the size of the regulating pond but no change in the proposed reservoir size (450 km2)and full supply level (538 meters above sea levels (MASL)). As a result of the increased capacity, the number of persons to be re- settled per GWh went down from 1.44 in the earlier option to 0.9 in the current project configu- ration. 70. The conclusions of the 1998 study have been reconfirmed by the results of the PSDP (2004). This study concluded that NT2, on the basis of a "weighted average generation cost" which values secondary energy at one-half the value of primary energy, i s by far the lowest cost alternative of some 20 projects analyzed, andremains so even when compared on the basis of an "adjusted weighted average generation cost" which takes into consideration the quantified mone- tary values attributable to environmental and social impacts. The PSDP concluded that NT2 represents the least-cost, Lao-based power supply option. In terms of the project's development objective, net GOL receipts from NT2 are the maximum that could be achieved compared with other Lao-based, export-oriented hydropower projects (Annexes 2B and 14 provide further de- tails). 71. NTPC has studied several alternative routes for the transmission lines from the power plant and has opted for two routes (the 500 kV double circuit line to Thailand and the 115 kV line to Thakek to tie into the Lao CR-2 system) which involve minimal relocation of households, although this choice i s about 10 percent more expensive than other alternative, shorter routes, Voltages lower than 500 kV, such as 230 kV, were consideredbut rejected as economically less attractive, apart from requiring more circuits and a wider transport corridor. C. IMPLEMENTATION C.l PartnershipArrangements 72. The Bank has worked in close partnership with the ADB and AFD in preparation of the project since March 2003. Close coordination has entailed joint missions on key issues, joint aide-memoires, joint letters to the GOL and NTPC, collective support for international work- shops, and participation in the Bank's Quality Enhancement Review. ADB has taken responsibil- ity for the CIA, the Summary Environmental and Social Impact Assessment (SESIA), technical assistance for the organization of the local consultations, due diligence on the Thai transmission line, and the assessment of GOL capacity to handle environmental and social impact mitigation measures. AFD has been responsible for assessment of the resettlement livelihood options on the 27 Nakai Plateau, design of the project's gender initiatives, and assistance to GOL with strategic communications activities. The Bank has taken the lead on all of the due diligence related to the broad safeguards agenda, economic and financial analysis, procurement, revenue and public ex- penditure management, and monitoring and evaluation aspects of the project. Furthermore, the Bank has been instrumental in assisting NTPC develop its financing package and GOL in coor- dinating its IFYbilateral equity package. This partnership was expanded in the course of 2004 to include EIB, NIB and COFACE, acting for participating French, Norwegian and Swedish export credit agencies. C.2 InstitutionalandImplementationArrangements 73. NT2 Hydropower Facility. The NT2 hydropower component will be implemented by NTPC, which was established on August 27, 2002, as a limited liability company incorporated under Lao PDR law. 74. The CA between NTPC and the GOL, signed on October 3, 2002, grants to NTPC a con- cession to develop, own, finance, construct and operate the NT2 hydropower plant and transfer it to the GOL at the end of the concession period under a "build-own-operate-transfer" (BOOT) arrangement. The C A i s for a period of 25 years from the date of commercial operations under the EGAT PPA which i s expected in November 2009. The C A allows NTPC to sell electrical energy under long-term "take-or-pay" PPAs to both EGAT and EDL. It also permits NTPC to undertake the construction of the hydropower plant through a turnkey HCC with the HC. 75. Pursuant to the EGAT PPA between NTPC and EGAT, signed on November 8, 2003, NTPC will make available to EGAT generating capacity of up to 995 MW and electrical energy of 5,636 GWh per year to be purchased at agreed tariffs. The EGAT PPA i s for a period of 25 years from the date of commercial operations. The project company, NTPC and GOL have indi- cated that an extended summary of the EGAT PPA (subject to EGAT's agreement) and an ex- tended summary of the C A (which underpin the contractual arrangements between GOL and NTPC) will be disclosed to the public. 76. The Shareholders' Agreement (SA), signed between EDL,EDFI, ITD, and EGCO on 19 September 2001, and acceded to by NTPC following its incorporation in September 2002, sets out the rights and obligations of the NTPC shareholders, provides for the objectives, establish- ment, management and operation of NTPC, and agrees on the Articles of Association of NTPC. The SA has a duration of 45 years from signing. The contractual structure of the project i s shown inFigure2. 77. An amendment to the SA and the C A will substitute the LHSE for EDL as the holder of the GOL equity in NTPC. Part of the funds derived from NTPC dividends received by LHSE will cover LHSE operating expenses and other reserve requirements under the Lao Business Law; the remainder of the funds will be transferred to the "NT2 Revenue Account" (see Annex 17). 28 Figure2: NT2Contractual Structure -------- N a n'I'heuii 2 Power Conipany ~ < Concession EDL EGAT Sub-contracts PPA PPA 78. The project will be operated b y NTPC Operation and Maintenance Division, and will be supported through other NTPC Divisions and the provision of technical services provided b y EDF and EGCO (acting through its subsidiary, Engineering & Service Co., Ltd. (ESCO)), and personnel services provided by EDF and ESCO, and possibly agreements for personnel support and training with EDL. Annex 8 provides further details regarding key contractual agreements for the project. 79. As head contractor, EDFwill have full responsibility for overall project management and delivery of the completed project for a fixed price and b y a specific date. It will subcontract the construction works through five principal subcontracts (three for civil works and two for elec- tromechanical packages). Subcontractors will work under its direction on fixed-price, time- certain, lump sum contracts; the only exception being the underground works which are part of civil works contracts (CW2 and CW3), estimated to amount to about US$20 million of a total HCC cost currently estimated at about US$722 million. The other three subcontracts place the constructionrisk fully on the subcontractor. 80. EDF will provide a roster of key project management and plant operations personnel whose qualifications must be satisfactory to the lenders. The four subcontractors - ITD, Nishi- matsu Contracting Company of Japan, General Electric of the USA and Mitsubishi-Sumitomo Electric of Japan - are all well known firms with considerable relevant experience in their re- spective fields. NTPC i s adequately staffed to oversee the construction activity o f the project and has entered into arrangements for operation of the plant. 29 81. To provide government oversight during project implementation, the GOL has estab- lished a Steering Committee, chaired by the Minister of Industry and Handicrafts (MIH),which includes representation at the level of Vice Minister and Provincial Governor of the ministries and provinces responsible for implementation of the project. The Steering Committee i s sup- ported by a Secretariat housed in the MIH, which will assist in coordinating implementation of the project through various specialized units. The Bureau of the Secretariat of the Lao National Committee on Energy (LNCE) will be responsible for managing GOL obligations in the C A and for acting as liaison between government agencies and the international lenders and other stake- holders in the project. The LHSE i s responsible for holding GOL equity and will be represented by a director in NTPC's board. The specialized units with respect to environmental and social obligations are described below. The overall institutional framework for project implementation i s shown in Annex 8B, and i s set forth in more detail, including roles, responsibilities and com- mitments of the various implementing agencies, in the Project Implementation Plan. 82. Management of Environmental and Social Impacts. The CA specifies the division of responsibilities between the GOL and NTPC for the construction and operation phases of the project. NTPC has contractually binding obligations and i s primarily responsible for financing and implementing two of the three safeguard plans (EAMP and SDP), while the third plan (SEMFOP) i s to be implementedby the GOL, with funding provided by NTPC. 83. NTPC's recently-formed Environment and Social Unit (ESU), comprising the Environ- mental Management Office and Resettlement Management Office, i s responsible for ensuring successful completion of the actions outlined in the EAMP and SDP. NTPC will also function as the project implementing entity for NTSEP and undertake the procurement, financial manage- ment, disbursement and progress reporting responsibilities on behalf of the GOL. The Bank has agreed with NTPC on the structure and staffing of the ESU. The NTSEP Project Agreement be- tween IDA and NTPC, and the Tripartite Agreement among Lao PDR (through the Ministry o f Finance - MOF), NTPC and LHSE, specify NTPC's project implementation responsibilities and obligations with respect to NTSEP. Responsibilities for environmental and social measures allo- cated to GOL are specified in the C A and in the Development Grant Agreement between IDA and Lao PDR. 84. The following specialized unitshave been established for the project by GOL: 0 The Resettlement Committee will guide plateau resettlement and downstream livelihoods programs. This committee i s chaired by the Governor of Khammouane Province and com- prises representatives of adjoining provinces (Bolikamxay and Savannakhet) and impacted districts, NTPC and representatives of selected national-level agencies. The committee i s supported b y a Resettlement Management Unit (RMU) which will have day-to-day respon- sibility to work with NTPC to implement the program and achieve the outcomes spelled out inthe SDP and CA; 0 The Environmental Management Unit (EMU), under the Science, Technology and Envi- ronment Agency (STEA), i s responsible for coordinating EAMP activities, implementing programs, undertaking monitoring and providing oversight with respect to activities under the EAMP; and 0 The WatershedManagement and Protection Authority (WMPA) i s responsible for ensuring conservation andprotection of the NT2Watershed, as set forth inthe SEMFOP. 30 85. As part of the on-going local consultation process, Village Facilitation Teams have been formed in many of the villages on the plateau, in the NNTNPA and in the downstream areas. They will continue to partner with NTPC and GOL to implementthe three safeguards plans. Op- erational NGOs will execute some of the environmental and social safeguards tasks, such as bio- diversity monitoring and patrolling in the NPA, support to the management of cross-border threats, delivery of social sector services (such as education and health), capacity building of GOL agencies and skills development in villages. Additional consultant services will be brought in as needed for implementation of the environmental and social mitigation and compensation programs. C.3 Monitoringand Evaluation of OutcomedResults 86. The M&E framework seeks to ensure that effective arrangements are in place for regular oversight of project implementation; that information i s available in adequate scope and detail on physical progress, impacts and outcomes from the project; and that reports are accurate, timely and relevant to the needs of the GOL, NTPC shareholders, financial institutions and other stake- holders involvedinthe project. Annex 5B describes these arrangements in detail. 87. Data collection and primary analysis will be the responsibility of the various project im- plementing units -the HCC, NTPC (primarily on the E&S aspects of the hydropower compo- nent and impact mitigatiodcompensation on the plateau and in the downstream areas), EMUand RMU (on the environmental and social programs), and the WMPA (on the NT2 Watershed). Each implementing unit will prepare periodic reports for their overseeing bodiedagencies (see Figure 1in Annex 5B). Timely internal andexternal dissemination of that information will be the responsibility of NTPC and the LNCE, each in their respective area of responsibility. M O F will report on public expenditure and revenue management arrangements. 88. There will be three distinct levels of independent project oversight. First, NTPC will have an Owner's Engineer overseeing the construction activities of the head contractor. Second, the GOL will have three independent international expert bodies to advise it on specific aspects of the project: (i)an independent engineer (GOLE) for technical aspects of the project; (ii)the DSRP for compliance with safety issues related to dam design, construction and operation; and (iii) POEfor environmentalandsocialissues.Thelattertwo panels aremandatedbythe the World Bank's safeguards policies. Their findings and recommendations are bindingupon NTPC. In addition, there will be three independent monitoring agencies (IMAs) overseeing the respec- tive performance of the three government implementing bodies (EMU, RMUand WMPA) on an annual basis. Their roles, responsibilities and funding are also provided inthe CA. 89. Finally, the lenders and guarantors will have the Lenders' Technical Advisor (LTA), a private firm under contract to the lenders but financed by NTPC under a long-term, binding commitment expressed in the NTSEP Project Agreement between IDA and NTPC.The LTA will monitor and evaluate the physical, environmental and social aspects of the project and manage- ment of the watershed on behalf of the private banks, IFIS,bilateral agencies and ECAs involved in the project. The LTA will provide a common supervision platform for all financiers, private and public. 90. Inaddition, all parties will benefit from the oversight exercised by the IAG. As the pro- ject moves into implementation, the role of the IAG, which has advised the Bank's President and senior management throughout the preparation phase, i s expected to expand to cover issues such 31 Risk RiskMitigationMeasures Ratingwith Unforeseen geological prob- Extensive geological studies; passing on substantial por- Modest lems while tunneling. tion of geological risk to the HC and subcontractors through a target price mechanism Plant energy shortfall: (i) inthe 1IDesign based on adequatehydrological data and expert Modest long term, due to hydrological modeling, and conservative design-energy output assump- shortfall and sedimentation; tion; enforcement of controls on human activities inthe and (ii)due to plant shutdown watershed area to safeguard against soil erosion; provi- during XBF flooding. sions inPPA for reduction o f energy during dry years and routinely when XBF floods. Heavy flood damage to civil Design of key structures for the PMF, adoption o f interna- Low works and failure of safety tionally recognizeddesign practices, and installation of a measures, leading to heavy sophisticated flood monitoring system for the XBF. XBFbasin flooding. 32 Risk RiskMitigationMeasures Rating with Mitigation Component 2.1 (a) Social Development Plateau Resettlement - Delays inimplementing obliga- C A specifies clear division of labor, budget, implementa- Modest tions under the C A regarding tion responsibilities, and accountability between GOL and (i) relocation;and(ii) NTPC,includingremediesfornon-performance.Inclu- physical (i) Low livelihoods restoration. sion of high levels of public accountability, transparency (ii) Modest and monitoring by POE, IMAs and possibly NGOs. Influx of population to the pla- Clear identification of eligible households through broad Modest teau attracted by prospects of dissemination of the 2003 census. Control o f in-migration benefiting from (i) project into the reservoir and resettlement sites. Revisionof plans (i) Low compensation packages or (ii) for Oudumsouk Town and others as needed to accommo- (ii) Substantial employment in construction- date camp followers. related activities compromising sustainability of livelihoods programs, putting pressure on resource base and integrity o f ethnic communities. Design features (such as Inclusion of a diverse range of activities with a flexible Substantial adaptability, soil quality, etc.) mix that has community acceptance; contingency funds and external factors (such as available to supplement additional interventions needed to (i) Low weather, disease, markets, fish achieve income targets; and continuous consultations. (ii)Modest population stability, etc.) Frontloading of programs, allowing time to assess house- (iii)High and/or difficulty of PAPSin hold adaptation to new activities and to adjust programs, adapting to new livelihood as needed. programs cause delays inthe achievement of intended in- come targets on (i) restoration of current livelihood levels (as per Bank minimumrequire- ment); (ii) 5" year income en- hancement target; and/or (iii) 9* year enhancement target. Delayed adoption of livelihood Program commences several years ahead of the impacts Modest programs by the affected com- occurring, with half the programexpected to be complete munities and difficulty of PAPS before COD. This provides advance knowledge of likely inadapting to new circum- outcomes and opportunity to modify approach. Provision stances to the pace o f program of a comprehensive, multi-dimensional community-based implementation. program o f fish production integrated with current farm- ing practices; adoption of a careful participatory planning process supported by technical assistance. Increase in the number of PO- A worst case scenario has been assumedto identify poten- Substantial tentially affected persons be- tially affected persons; a cut-off date will be established cause of worse than expected and publicized; and budget for unanticipated impacts (also water quality or flooding or covering increase inaffected people) has been provided. due to in-migration. Limitedprior experience of C A specifies obligations of NTPC and GOL, and clear Modest/Substantial NTPC and GOL to implement division of labor. NTPC intends engaging specialist insti- such an ambitious downstream tutions having prior experience in similar programs else- program. where, supported by comprehensive monitoring and I - evaluation mechanism. 33 Risk RiskMitigationMeasures Rating with Mitigation Arrangements specified inthe An environmental compliance regime for the project is Modest CA to ensure compliance with detailed inthe EAMP, and respective obligations are environmental standards by stated inthe CA, and also inthe contract between NTPC NTPC, HCC and sub- and HCC, and sub-contractors. Site-specific environ- contractors are not working mental plans (SSEPs) are to be approved by EMUprior to effectively. commencement of site-specific activities. Also the project will fund the capacity buildingof EMUboth at the na- tional and 1ocal:level to strengthen their capacity. Habitats for certain species are The design of the wildlife programs will incorporate pro- ModestlSubstantial threatened due to pressures visions for detailed monitoring, which will provide ad- from plateau residents, con- vance warning to impending threats. Further, codes of struction workers and camp practices and regulations are being framed to ensure that followers. construction workers and camp followers do not involve inpoaching and wildlife trade. WMPA suffers from lack of WMPA i s managed by a multi-sector board of directors. It Modest capacity to implement has secure financing for 30 years, and has flexibility to SEMFOP and coordinate with hire qualified and competent staff and advisors from the sectoral agencies and district market (unlike conventional government agencies). authorities. SEMFOP includes support for skills development, estab- lishing procedures and protocols, and involvement of op- erational NGOs. "Shared Vision" with respect to GOL i s bound to maintain the integrity of the watershed, Substantial limitsto development or re- as expressed inthe provisions of Decree 39 and the cove- source exploitation only par- nants inthe Development Grant Agreement. High levels tially implemented. of public participation, transparency and accountability are built into the SEMFOP and the M&E arrangements. Conservation goals articulated SEMFOP is designed as a comprehensive program incor- Substantial inthe SEMFOP compromised porating patrolling and enforcement, community planning due to threats from within and and participation, community-based resource manage- outside the watershed. ment, outreach and education activities and provisions for controlling cross-border wildlife trade and prohibiting commercial activities within the watershed. Comvonent3: Monitoring and Evaluation (Revenue and Expenditure Management) NT2 revenues do not flow to Establishmentof a sDecial NT2 Revenue Account into Modest priority poverty reduction and which all revenues flow. This account and eligible pro- environmentkonservation grams will be subject to annual audits according to management programs. INTOSAIstandards. The priority programs will be re- quired to meet financial management and reporting stan- dards with monitoring systems and mechanisms for per- formance evaluation. Additional monitoring will be done through biannual PERs and PETS. I Delays in the implementation Key milestones for PEMSP are actions specified under the ModestlSubstantial of PEMreforms (chart of ac- sequence o f PRSCs. PEMSP includes adequate support counts, financial reporting). for capacity building. The Development Grant Agreement contains covenants that specify the key elements of reve- nue management arrangements. Arrangements require that M O F only allocates NT2 revenues to programs that meet eligibilitv criteria. 34 Risk RiskMitigation Measures Rating with Mitigation Country Performance Government is unable to com- Agreements and assurances have been embedded in the Modest ply with the agreements under- Development Grant Agreement and GLIP. Detailed im- pinningthe project and assur- plementationplans have been prepared and approved by ances provided to the lending Government. Capacity building initiatives have been institutions. agreed for the medium term. A monitoring and evaluation framework i s inplace to track progress and correct prob- lems as they are identified. Annual consultations allow for an open dialogue to review performance. CAS scenarios are linked to NT2 performance. Partnership arrangements with kev donors have been agreed. 94. There are two areas of risk that require additional explanation. 95. Revenue Management Risks. Support to the PEMSP's capacity buildinginitiatives, close monitoring of PEMSP implementation and the linking of PEMSP milestones to PRSC prior ac- tions during the period to 2007 mitigates the risk of delays in implementation of key elements of the proposed revenue and expenditure management arrangements, including: the revised chart of accounts, and program level financial reporting and monitoring mechanisms. Implementation of Public Expenditure Reviews and Public Expenditure Tracking Surveys will help assess whether NT2 revenues are being applied infinancing eligible programs and whether these programs actu- ally meet eligibility criteria. Six months prior to COD the status of NT2 revenue management arrangements will be reviewed as part of a comprehensive project progress review. The key ele- ments of the revenue management arrangements are reflected in the Development Grant Agree- ment and the GLIP. G O L has expressed its commitment to only apply NT2 revenues to financing those programs that meet eligibility requirements. 96. Country Risk. The project poses significant risks to the reputation of the World Bank, other LFIs and bilateral agencies involved should the programs relating to revenue management, conservation of the N T 2 Watershed, livelihoods restoration for those being resettled or otherwise impacted by the project, and support for ethnic minorities undergoing involuntary resettlement fail to achieve their targets. Most of these risks remain, in whole or in part, the responsibility of the Government. 97. Over the past few years, GOL has shown its commitment to the project and demonstrated its ability to move quickly to resolve environmental and social safeguards issues within the pro- ject area. It has effectively halted illegal logging on the Nakai Plateau and in the NNTNPA.GOL has agreed to adjust the boundaries of a gold miningconcession in the Ban N a Kadok area which threatened the NNTNPA and has agreed, in the GLIP and the SEMFOP, to prohibit future com- mercial development and road construction in the NNTNPA. Further, GOL has established a new regulatory framework for the WMF'A and for forestry and natural resource management. GOL has collaborated with NTPC and external consultants to carry out local consultations and, according to independent observers, helped create an environment where the affected communi- ties gave candid feedback. It also participated fully in the international workshops in 2004, clearly setting forth its position on key aspects of the project. 35 98. Overall Risk Assessment. The overall assessment of risks of the project i s considered to be Modest to Substantial - estimated at the high end of the range for Modest and the low end of the range for Substantial. The proposed monitoring and evaluation framework in the project makes these risks manageable, ensuring early detection of problems and the timely implementa- tion of appropriate compensating measures. In addition, the CAS and the design of the project have built into it several features that help to manage these risks. The most important to project success include: A series of PRSCs to provide an overarching framework for a programmatic policy agenda; Multi-donor technical assistance and funding to help the G O L improve its public expendi- ture management, starting well in advance of the flow of NT2 revenues; Scheduling o f public expenditure reviews and public expenditure tracking surveys to moni- tor the application of NT2 revenues for agreed priority programs and effectiveness of spending; Clarification of the roles, responsibilities and authorities of the central, provincial and dis- trict government agencies with regardto project-related activities and programs; NTPC's contractual obligation (through the CA) to ensure the achievement of the outcomes of environmental and social mitigation and compensation programs, including resettlement and livelihood restoration on the plateau and in the downstream areas, and obligations (through the NTSEP Project Agreement) to implement the project in accordance with the SDP andEAMP; Long-term (30-year) funding for the watershed management program, from project reve- nues and project-relatedinvestment as well as technical assistance, financed under the IDA NTSEP grant and AFD grant; International experts (DSRP, GOLE, IAG and POE) to monitor dam safety, technical pro- gress, project effectiveness, the achievement of income targets and other key objectives of the social and environmental programs, and the commitments of NTPC and the GOL; A program of independent transparent monitoring and evaluation of project performance, including the publication of project performance evaluations, progress reports, and moni- toring data; Regular field-based supervision, monitoring and support from the World Bank, ADB and AFD; and Annual public consultative meetings to provide a high level of public scrutiny, transpar- ency and accountability. Sustainability The GOL recognizes the importance o f optimal development of the power sector, includ- ing measures to promote energy conservation and to improve expansion planning. GOL proposes to continue its cooperation with the Mekong River Commission, other riparian countries and de- velopment partners in the Mekong Region to optimize decisions on water resources management and hydropower development, taking into account trans-boundary benefits and costs, including 36 environmental and social aspects. In addition, GOL has requested the assistance of the World Bank, ADB and other partners to improve the governance and management o f hydropower plan- ning and development within Lao PDR, including improved revenue management. Through the LEnS project, ADB's assistance program, and other instruments, the GOL i s also seeking sup- port to improve its safeguard policies and its capacity to conduct and apply the findings of envi- ronmental assessments, resettlement action plans, ethnic minority development plans and other relatedinstruments inthe hydropower sector. 100. GOL`s regulatory framework provides for the conservation of protected areas, wildlife and forests, prohibits the export of unprocessed timber (logs), and protects the rights o f ethnic minorities, It has also been strengthened with regard to its specific application to the NT2 pro- ject. In practice, however, enforcement of these laws and decrees is weak. While GOL has shown that it i s able to stop illegal logging inthe project area, such activities continue elsewhere. To some extent the existing situation can be attributed to the lack of enforcement capacity and acute shortages of funds available to local administration. The LEnS project aims to address these issues and to strengthen GOL's capacity to manage its protected areas, through resources provided through the Lao Environment and ConservationFund and an institutional strengthening program focusing on safeguards assessment, monitoring and compliance, environmental educa- tion and awareness, and integratedriver basin management. C.6 RecourseOptions 101. If during the IDA grant disbursement period, Government is unable to meet its obliga- tions under the Development Grant Agreement or the Indemnity Agreement, the Bank will have the right to invoke legal remedies, including suspension of the undisbursed portion of the IDA grant or suspension of coverage for future commercial loan disbursements under the IDA guar- antee. If such suspension of disbursement takes place, the Bank will also have the right to sus- pend any or all of its other operations in the lending portfolio. This leverage i s available even after the grant i s fully disbursed for the 15-year duration of the Development Grant Agreement. After project completion the Bank also retains the ability to reduce its level of assistance, includ- ing new IDA lending or grants, under CAS scenarios in the case of poor performance in relation to the NT2 Project Agreements. Assessments relating to NT2 performance will be made in regu- lar consultation with other NT2 financing partners, under a set of partnership principles that have been shared with the broader development community (see Annex 18 for details of the Partner- ship Principles). Important leverage of the Bank comes from the highvisibility of the project and the broad level of support and buy-in generated by the extensive consultations undertaken during preparation, the continued consultations to be undertaken duringimplementation with key stake- holders, using a forum such as the government-led, UNDP-supportedRoundTable Mechanism. C.7 GrantandGuaranteeConditionsand Covenants 102. Conditions for effectiveness of the IDA Guarantee Agreement and the Development Grant Agreement (beyond standardIDA and MIGA guarantee conditions) are as follows: 0 LHSE, with Articles of Association acceptable to the Association, has been duly estab- lishedin accordance with the laws of the Recipient. The LHSELoan and Shareholder Agreement has been executed on behalf of the Recipient and LHSE in accordance with the provisions of Section 3.02 (a) of this Agreement. 37 The Tri-partite Agreement has been executed on behalf of the Recipient, LHSEand NTPC inaccordance with the provisions of the DGA. The three member Dam Safety Review Panel has formally commented on and made rec- ommendations to the Recipient on: (i) the final design of the dam to be constructed under the Project and (ii) operations and maintenance plan inrespect thereof. the The core staff of each of the EMU, the RMU and the executive secretariat of the WMPA have been appointed in accordance with the provisions of the Development Grant Agree- ment. 0 The Recipient's Ministry of Agriculture andForestry has issued a saw-milling license satis- factory to the Association to the Nakai Plateau Village Forestry Association. WMPA has engaged patrolling and enforcement consultants in accordance with terms of reference satisfactory to the Association. Each of (i)a summary of the final PIP and (ii) a final copy of the first year AIP, satisfac- tory to the Association has been providedto the Association. All amendments to the Concession Agreement, Power Purchase Agreement and Sharehold- ers' Agreement, acceptable to the Association, are effective. 0 All conditions precedent to the effectiveness of each of the IDA Guarantee Agreement, the Indemnity Agreement and the IDA Guaranteed Facility Agreement have been met. 103. Dated covenants and conditions for the IDA NTSEP Grant are as follows: (a) For environmental and social safeguard issues: Carry out the institutional strengthening program for WMPA, as contemplated by the SEMFOP, satisfactory to the Association; and by May 1of each year, commencing 2005, prepare and thereafter an Annual Implementation Plan, giving due regard to the Association's views thereon. Cause NTPC, by May 15, 2005, to prepare and provide to the Association for its review and comment, a community forestry management plan for the Re- settlement Areas; and thereafter implement such plan as agreed with the As- sociation, in a manner acceptable to the Association. 0 Carry out andor cause to be carried out the Social and Environmental Man- agement Framework and FirstOperational Plan in a manner satisfactory to the Association and designed to ensure that the Nam Theun 2 Watershed Area will be conserved, protected and maintained in accordance with Decree 39 of 2005, and to this end: (i) by June 30, 2005, engage or cause to be engaged technical assistance consultants in accordance with the provisions of the Pro- curement Plan, and not later than June 30, 2005, provide to the Association a satisfactory time-bound plan to hire staff for all positions identified in the SEMFOP and thereafter appoint all such staff in accordance with the plan; (ii) take all necessary action to maintain WMPA in accordance with Decree 39 and with appropriate management, staffing and resources to enable it to man- 38 age the Nam Theun 2 Watershed Area and to implement the SEMFOP; (iii) provide to the Association for its prior concurrence any revision or amend- ment proposed to be introduced into the SEMFOP and/or Decree 39, in order to achieve its objectives; maintain, policies and procedures adequate to enable it to monitor and evaluate the implementation of the SEMFOP, and the achievement of its objectives, and to that end prepare and provide to the Asso- ciation for its review a draft second Operational Plan, not later than December 31, 2010; and (iv) promptly notify the Association of any material transgres- sions with respect to admissible land uses and activities set forth inDecree 39 and take all actions as may be reasonably necessary to correct such transgres- sions. e Prepare and provide to the Association b y no later than October 31, 2005 for its review and comment, a salvage logging plan, and thereafter, implement such plan as agreed with the Association, in a manner acceptable to the Asso- ciation. e Take all such steps as are reasonably necessary to ensure that no persons other than Project Affected People (PAPs) are permitted to occupy the resettlement area except in accordance with the provisions of the Concession Agreement, including revising, by no later than May 1, 2006, the urban plans of Gnom- malath and Oudomsouk Towns and any other towns in the Nakai Plateau likely to receive a significant influx of population arising out of construction activities under the Project. e Cause NTPC by June 30, 2006, to provide to the Association a detailed down- stream mitigatiodcompensation plan, in compliance with the Concession Agreement, and thereafter implement such plan as shall have been agreed with the Association. Maintain the Environmental Management Unit with staffing, facilities, re- sources and terms of reference acceptable to the Association. Maintain the Resettlement Management Unit, including a Coordinating and Management Office for the Nam Theun 2 Reservoir, with staffing, facilities, resources and terms o f reference acceptable to the Association. Maintain each District Resettlement Working Group each Village Resettle- ment Committee to implement certain Project activities. Cause NTPC to contract qualified consultants for designing the downstream activities in accordance with the Concession Agreement and the Social Devel- opment Plan. Inthe event that any additional land i s required either permanently or tempo- rarily during Project implementation for construction and/or operation of the NT2 Hydroelectric Power Facility under the Project, take all such action nec- essary to cause NTPC to: apply the mitigation principles and measures and provide to PAPs compensation, resettlement and rehabilitation entitlements in 39 accordance with the principles and objectives set forth in the Concession Agreement and the relevant Additional Plan; undertake timely informed con- sultation with the PAPs and make publicly available the plans designed to provide the required compensation and entitlements; and promptly notify the Association of such occurrences andfurnish the plans to the Association. 0 In the event that the compensation and mitigation program for the Down- stream Areas exceeds the allocated budget provided for in the Concession Agreement, take or cause to be taken such action as shall be necessary to ap- ply the mitigation principles and measures and provide to the PAPs compen- sation and rehabilitation entitlements in accordance with the principles and objectives set forth in the Concession Agreement and the relevant Additional Plan, including undertaking informed consultation with the PAPs and making publicly available the plans designed to provide the required entitlements; and promptly notifying the Association of such occurrences and furnish the plans to the Association. 0 Maintain the Social and Environmental Panel of Experts as a permanent standing body throughout the concession period, in accordance with the terms of the Concession Agreement. 0 Maintain through the sixth anniversary of the Commercial Operations Date, a Dam Safety Review Panel in accordance with the Clause 29 of the Concession Agreement. 0 Provide to the Association a copy of each report prepared by the Social and Environmental Panel of Experts and the Dam Safety Review Panel. (b) For public expenditure andrevenue management arrangements: 0 Prepare from 2005 through 2009 an annual PEMSP work plan for the forth- coming Fiscal Year; and, from 2005, prepare biannual PEMSP progress re- ports. 0 InFY2006, and every secondFiscal Year thereafter, (i) with the Asso- jointly ciation carry out public expenditure reviews and public expenditure tracking surveys under terms of reference acceptable to the Association; and (ii) upon completion of such reviews and surveys, make publicly available. 0 Undertake an audit peer review of the Recipient's State Audit Organization in accordance with International Organization o f Supreme Audit Institutions standards in FY2006, in the FY in which the Recipient first receives revenues fromthe NT2Hydroelectric Power Facility, and every third year thereafter, by a Supreme Audit Institution which is a member of the INTOSAI and accept- able to the Association, and make publicly available a summary report of the peer review. 40 0 Monitor and evaluate on an ongoing basis, in accordance with indicators satis- factory to the Association, progress in carrying out the Program and the Pro- ject and the achievement of their objectives; provide the Association access to data, personnel and documentation needed to assess progress in the implemen- tation of the Program and the Project, including the implementation of the revenue and expenditure management arrangements, the financial control en- vironment and the performance of Eligible Programs; (iii) commencing in 2006, provide the Association semi-annual reports on the progress achieved in carrying out the Program and the Project, and (iv) make publicly available each such report. 0 From FY2008 onwards, prepare a summary budget includingtherein details of projected NT2 Revenues, their allocation to Eligible Programs and total ex- penditures on Eligible Programs for such Fiscal Year, and publish the sum- marybudgetwithin sixty days of its approval by the National Assembly. 0 From FY2008 onwards, (i) budget execution reports and annual fi- prepare nancial statements and undertake audits of Eligible Programs; and (ii) make publicly available said reports, statements and audit reports in a manner and substance satisfactory to the Association. 0 Maintain the NT2 Revenue Account described in the NT2 Revenue Manage- ment Program in accordance with its undertakings set out therein; take all such steps as are necessary to ensure that all NT2 Revenues are deposited into the NT2 Revenue Account; and apply all resources in the NT2 Revenue Ac- count exclusively for (i) additional funding for Eligible Programs as described inthe NT2 Revenue Management Program, (ii) repayments (principal and any interest) and related charges arising out of loan and grants made to the Recipi- ent and on-lent to the LHSE to finance its equity in NTPC, and (iii) expendi- tures related to the exercise of the Recipient's rights and the performance of its obligations under the Concession Agreement and Project Documents. (c) For financial management arrangements: Ensure that a financial management system i s established and maintained, in- cluding records and accounts, and that financial statements are prepared in ac- cordance with consistently applied accounting standards acceptable to the As- sociation, adequate to reflect the operations, resources and expenditures related to the Project; and further ensure that such financial statements are au- dited each fiscal year by independent auditors acceptable to the Association. (d) For implementation, monitoring and evaluation arrangements: Maintain policies and procedures adequate to enable it to monitor and evalu- ate the implementation of the Concession Agreement, the Government Letter of Implementation Policy, the Additional Plans and the Annual Implementa- tion Plans, and the achievement of their respective objectives; and to this end, by June 30,2005 engage the services of an International monitoring agency or agencies, 41 0 Commencing in 2006, hold an annual consultative review on progress in car- rying out the Project and the Program, with the participation of NTPC, inter- national financial institutions participating in the financing o f NT2 Hydroelec- tric Power Facility, and local and international civil society. 0 Take all action necessary to cause NTPC to perform in accordance with the provisions of the NTSEP Project Agreement all NTPC's obligations therein set forth, and to this end take and cause to be taken all action necessary or ap- propriate to enable NTPC to perform such obligations, including granting all necessary approvals, permits or licenses, and shall not take or pennit to be taken any action which would prevent or interfere with such performance. 0 Review with the Association the progress achieved in the implementation of the Program and the Project no later than six months prior to the expected Commercial Operations Date. 0 Afford the Association and including the Lenders' Technical Adviser, all rea- sonable access to information needed to assess progress in implementing the Program and all reasonable opportunities to have access to the area of the Pro- ject. Carry out, in a manner satisfactory to the Association, all of its obligations under the Concession Agreement. D. APPRAISAL SUMMARY D.l Economic and FinancialAnalysis 104. Project Economic Analysis. The project economic analysis addresses: (i) whether there i s demand for NT2 power in the Thai market; (ii) whether the project forms part of a least-cost power system expansion program for Thailand and Lao PDR, and the risks that it may not; (iii) the project's Economic Internal Rate of Return (ERR) and related sensitivity analysis; and (iv) whether the NT2 PPA i s likely to be commercially sustainable inthe Thai power market. 105. Demandfor NT2 Power.The economic analysis includes a comprehensive evaluation of projected demand and supply conditions in the Thai power market and an assessment of Lao PDR's absorptive capacity for its 5 percent energy share, as well as projected relative costs of competing power generation technologies. The demand and supply analysis indicates that Thai- land will need the capacity of NT2 by 2010, and that its full allocation (about 95 percent of the project capacity) will be absorbed within that year, despite the prospects for additional savings from demand-side management and a minor potential increase in the supply of renewable en- ergy, which together could, at most, result in less than a one year delay of the optimal in-service date for NT2. It also indicates that the Lao Central-2 (CR-2) electricity region will fully absorb its share of the project inthe same year. 106. Least-cost Analysis. Thailand can generate electricity from a range of generation tech- nologies andprimary energy types: NT2, oil-fired steam, coal-fired steam, gas turbines and com- bined cycle gas turbines (CCGTs) burning natural gas, and renewable energies such as biomass, 42 wind, solar and mini hydro. Using a proven power system expansion optimization model, and based on the estimated capital cost of competitive CCGT technology, the closest alternative source of generation, the long-term gas price forecast and estimated demand growth, the eco- nomic analysis for the project demonstrates that NT2 i s the least-cost economic alternative for incremental power supply to Thailand and the CR-2 grid inLao PDR. Details of this analysis are inAnnex 11A. 107. For NT2 to be a robust, economic (least-cost) contributor to the energy needs of the two countries, it should remain least-cost given the uncertain future performance of several key fac- tors that could impact on its economic viability. The framework of the least-cost analysis i s a probabilistic risk assessment for key uncertainties that could have an important impact on the extent to which N T 2 may be a least-cost option. These uncertainties are the N T 2 project cost,20 the growth rate o f electricity demand in Thailand and the cost of natural gas for CCGT plants that would otherwise be the technology of choice without NT2. This analysis compares power system expansion costs with versus without NT2, using combinations of values for these three uncertainties, and calculates NT2's net cost advantage for each combination, showing each com- bination's probability of occurrence (PO). 108. Under base case assumptions for the three tested uncertain variables, NT2 has an ex- pected net present economic cost advantage of US$266 million at a 10 percent discount rate. Around the base case, the NPV of NT2 relative to the next best alternative (largely CCGT) ranges from negative US$259 million to positive US$471 million, depending on changes in the assumptions on project costs, power demand forecasts and natural gas prices. The extremes of the range would have a very low probability of occurrence.21These results include the costs of environmental and social measures that the project will pay. These are not quite the same as the estimated economic value of the targeted impacts. The present value (PV) of mitigation costs to be paid-out by the project company i s US$63.8 million. One could have used instead the PV US$54.7 million estimated economic cost of the E&S impacts; however the higher anticipated pay-out cost i s charged against the project, as this amount tests the project a bit more severely and may be a more certain value than the economic estimate. 109. Economic Rate of Return Analysis (ERR).While the least-cost analysis discussed above compares the relative values of alternative supply options to see under what conditions NT2 i s least-cost, the ERR measures the extent to which the value of the electricity to end-users exceeds the costs of providing it to them, including the economic costs o f the project (with E&S payouts, transmission and distribution costs), and the annual loss of some Theun Hinboun energy. The project's base case ERR i s 16.3 percent with sensitivity analysis for downside risks shown inTa- ble 8. Furtherdetails are in Annex 11A. 2o The NT2 project cost includes associated transmission, Theun Hinboun energy loss and the costs of E&S im- pact mitigation. 21 Details of the sensitivity analyses are discussed inAnnex 11A. 43 110. Commercial Sustainability Analysis. This analysis tests whether the PPA is likely to re- main commercially competitive with the next best power supply option in Thailand given the PPA prices and estimated future market prices for energy from combined-cycle gas turbines. If so, the PPA should have continuing commercial interest to the contracting parties. This has been tested across the same range of demand forecasts and natural gas price risks used in the eco- nomic analysis above, comparing the prices in the NT2 PPA with the projected costs of energy from combined cycle gas turbines, implemented as an independent power producer contract (IPP) on commercial terms. Inthe base case, the NT2PPA has a present value cost advantage of US$227 million. The net present value (NPV) of the sensitivity analysis ranges from minus US$109 million to plus US$161 million. The overall probability of positive NPV for the project i s over 80 percent and that of negative NPV i s under 20 percent. These tests suggest that the NT2 PPA should retain its probable competitiveness in the Thai power market. 111. Assessmentof Macroeconomic Impacts of the NT2 Project. The NT2 project will add to GDP growth through higher investments during construction and higher exports during opera- tion, as well as increased revenue (see Section B.4). Total investment of more than US$1.25 bil- lion will be made during the 2005 to 2009 period, implying a significant rise in the investment share in GDP. Around US$300 million of total investment, or US$60 million a year, will be spent on domestic civil works and domestic services during the construction period of 2005 to 2009.22 Additional annual exports averaging about US$220 million annually will come from sales of electricity to Thailand starting in 2010, which will raise significantly the share o f exports in GDP. Thus, NT2 will increase annual GDP growth rates during its construction and after its operation. 112. Other macroeconomic effects arise from the spending o f NT2 foreign exchange inflows into Lao PDR.23Additional spending of foreign exchange as a result of N T 2 - during investment and after commissioning - will cause a moderate increase in the rate of appreciation of the real exchange rate starting from 2005. This will raise the prices of non-traded goods (e.g. construc- 22 This calculation excludes the fact that some of the imported services used in the project will result in spending inLao PDR, but it also ignores the fact that a substantial proportionof the domestic civil works contracts will themselves require imported capital goods. This is, thus, an upper bound on actual domestic spending out of NT2 investment. 23 These effects are based on analysis in a paper by Peter Warr, "The Proposed NT.2 Project: Understanding the Macroeconomic Effects," prepared for the World Bank, December 2004. 44 tion services) relative to traded goods' prices (e.g. agricultural and manufactured goods) in Lao PDR that could discourage the production of traded goods. Estimates, based on the impact of past inflows of foreign aid and foreign investment on the real exchange rate, suggest that the proposed spending of US$60 million a year on domestic services out o f the total N T 2 invest- ment, will appreciate the real exchange by around 1.7 percent a year or 8.5 percent over the 5 year period of N T 2 con~truction~~. This will be on top of the pressures for real appreciation that i s generated by the inflows of foreign aid and other foreign investments. After commissioning of the NT2 project beginning in 2010, the spending of project export receipts (excluding debt ser- vice and external dividend ayments) in Lao PDR i s estimated to appreciate the real exchange rate b y 0.8 percent per year. P, 113. Given relatively modest rates of appreciation, the potential adverse effects can be miti- gated by appropriate policies and public spending as was done successfully in a few oil-rich countries and also in Lao PDR in the 1990s. In future, continued reforms to reduce transaction costs for private businesses, exporters and land purchasers can mitigate some of the disincentive arising from moderate appreciation. Similarly, additional government revenue from N T 2 spent on priority programs improving delivery of infrastructure and social sector services, on top of what i s spent from general revenue will reduce costs of transportation and production, as well as enhance productivity, helping to mitigate the adverse effects of the additional real appreciation.26 114. Project Financial Analysis. Financial analysis carried out for the project shows it to be financially viable, both from GOL's perspective as well as that of the other shareholders. (See Annex 11Bfor details.) 115. The project generates a total PV27(cash flow before debt service and any taxes) of about US$1,289 million, of which GOL would receive about US$329 million (before deducting re- payment of any debt it incurs to finance its equity contribution). The private sponsors would re- ceive about US$397 million. The remaining cash flow of about US$563 million would be used primarily to service the commercial debt. The share of financial benefits accruing to the GOL and the private sector shareholders i s considered reasonable given that GOL i s only a 25 percent equity partner, and that almost all of the commercial risk i s allocated to the project sponsors (in- cluding the G O L for its share) andor other parties, including construction subcontractors. 116. The financial net present value (FNPV) of the project (as a whole) i s expected to be US$235 million (calculated with total project costs of US$1,250 million, gross revenues arising out of the EGAT PPA, expected operating costs and prior to payment of debt service for the life of the concession). This analysis has been undertaken from the perspective of the project as a whole and not from the perspective of the equity providers and therefore it includes all capital costs and notjust those funded by the project equity providers. 24 This is basedon the assumption that the same relationship will hold between spending of foreign exchange in- flows and the real exchange rate as existed during 2000-2003 period when such inflows appreciated the real ex- change rate of Lao PDR by 2.8 percent a year. 25 See Peter warr's paper, OD. cit. 26 In any case given the large share of agriculture in GDP, losses of `learning-by-doing' economies are not likely to be significant. " Present Values and Net Present Values are calculated at the Weighted Average Cost o f Capital (WACC). The pre-completion WACC for the project is expected to be 9.76 percent, based on the calculated equity rate of re- turn. 45 117. The FNPV of returns to NTPC's four shareholders i s US$442 million (calculated with equity contributions by NTPC shareholders and net revenues after operating expenses and debt service payments for the life of the concession). O f the US$442 million, GOL's NPV from the project would be US$246 million (before deducting repayment of any debt it incurs to finance its equity contribution) and the private sponsors' NPV from the project would be about US$196 million. 118. The financial internal rate of return (FIRR) for the project i s 11.7 percent, the FIRR to the private sponsors i s less than 16 percent, which i s considered to be reasonable and consistent with market practice,28 and to GOL about 21.6 percent. Table 9 provides an overview of project re- turns. I Table 9: ProjectReturns(FNPVsandFIRRs)(US$ millions) I Project as a Whole'' Government of Lao Private Sponsors PDR I II Gross Revenues (US$ millions) I 6,129 1,959 I 2,125 I Present Value of Returns @ WACC (US$ 329 millions) 397 II II II FIRR(%) 11.7 21.6 <16%30 FNPV @ WACC (US$ millions) II 235 II 246 I 196 -1 119. GOL benefits from three streams of revenues (taxes, royalties and dividends), although large portions of its revenues are generated in the latter half of the concession term and its equity contribution i s front-ended in the financing plan. The private sponsors' returns from dividends (for their 75 percent share in NTPC) are proportionally greater than those of the government from its dividend share (for its 25 percent share in NTPC) because their equity contributions are back-ended in the financing plan.31Table 10 details the distribution of revenues to GOL from the project. I Table 10: NominalRevenuesto GOL (US$ Millions) Resource Income Taxes Dividends GOL Contri- Usage Charge bution from (Royalties) NTPC Base Case Cumulative (inNominal US$ 783 438 709 29.2 millions) Base Case Present Value at WACC (in 118.0 57.7 132.4 20.8 US$ millions) 28 The private sponsors' return is commercially sensitive and proprietary information. 29 FNPVsand FIRRs are calculated on the basis of the project's cash flow before debt service and taxes. 30 Commercially sensitive and proprietary information. 31 Unlike normal project financings and given the large amount of development expenditures already spent by the private sponsors, commercial lenders have agreed to disburse debt before equity (in lieu of an L/C for the full amount o f equity). Unlike the three private sponsors, the GOL has not been able to provide a creditworthy L/C and therefore will be injecting its equity contributions before the other three private sponsors. 46 120. The project maintains a reasonable senior debt service cover ratio (DSCR). In the base case scenario, the minimumDSCR i s 1.48 and the average DSCR i s 1.68, which are reasonable from a project finance perspective. 121. A sensitivity and scenario analysis has also been carried out on the project cash flow (see Table 11). The returns to GOL and to the sponsors are reasonably sensitive to significant time delays in implementation of the project. Given the lump sum, fixed price, date certain nature of the construction contracts, the financial impact of an increase/decrease in construction costs on the project, sponsors or the GOL i s expected to be minimal and so sensitivities on project costs have not been carried out. Table 11spotlights a few of the downside scenarios considered. An- nex 11B provides details of such analyses. Scenario Projectas a Whole Lao PDR PrivateSponsors Lenders IRR NPV3' IRR NPV IRR33 NPV Minimum (asa %) (US$ (asa (US$ (+/-over (US$ DebtSer- millions) %) millions) the base millions) vice Cover case as - Ratio a %) Base Case34 11.7 234.7 21.6 246.2 196.0 1.48 10% increase in construction costs with no delays35 11.0 157.4 21.6 246.2 196.0 1.48 1-year delay incommission- ing on account of non- 9.7 -13.3 16.9 169.9 -4.1 73.5 1.26 performance by NTPC36 Hydrology Risk-average reduction inPEof 13% over the first 2 years of the operat- 11.5 211.8 21.1 240.1 -0.7 180.3 1.17 ing period37 1-year delay incommission- ing on account of non- performance by NTPC & average reduction inPE of 9.5 -34.8 16.6 165.1 -4.5 61.1 1.02 13%over the first 2 years of the operating period 32 Discounted at WACC (9.76 percent) for the project. 33 Commercially sensitive and proprietary information. 34 No contingent finance i s utilized and project begins operations as scheduled. 35 NTPC shall bear no additional cost overruns and hence the shareholders of NTPC, its lenders and GOL are not expected to be affected by an increase inconstruction costs -the project i s being constructed on a price capped, turnkey basis. Contractually NTPC i s only liable for up to US$35 million of unforeseen cost overruns or for geological contingencies, which have been prefunded inthe financing plan. 36 The project i s being constructed on a turnkey basis. Contractually, NTPC i s only liable for up to US$35 million of unforeseen cost overruns or for geological contingencies. 37 Based on the worst hydrology scenario projectedby the Technical Advisor to the commercial lenders. 47 D.2 Technical 122. The following key features underscore the design approach for NT2 and confirm that it conforms to international standards and best practice: NT2 presents relatively straightforward features requiring standard hydropower design and construction practices. The DSRP (whose members are internationally recognized experts, fully familiar with the state-of-the-art in design, construction and operation of hydropower projects) has had continuous, in-depth involvement throughout the design process. It has signaled its agreement that all investigative studies and tests, designs, procurement docu- ments and construction methods are satisfactory. In conclusion, the designs preparedby in- ternationally reputable firms have been fine-tuned based on advice and recommendations by the DSRP and reviewed b y the Bank's experts, provide the necessary degree of assur- ance that the NT2 project conforms to current best international practices. Thailand requires additional generating capacity to meet its electricity needs from 2010 onwards. NT2provides a competitive least cost option, for fulfilling this need, compared to gas-fired plants in Thailand. It i s the least cost option among alternative hydropower schemes in Lao PDR. The project takes into account possible savings from demand side management (DSM) and the exploitation of renewable energy options. Even if 1,000 MW of DSMwere to occur, over and above that already programmed into the demand forecast, it would delay the full uptake of NT2 power by less than one year. The basic design parameters of NT2 dam height and dam location (which govern land sub- mergence by the size of the reservoir) have been optimized taking into consideration the need to balance economic viability with environmental and social impacts. The type of dam design i s optimum vis-&-vis its height and governing geotechnical fea- tures. The power house building i s above-ground rather than the more expensive under- ground alternative to minimize construction risk and cost. The power and energy genera- tion capability, the number and size of units, and the size of the balancing reservoir have been optimized, taking into consideration EGAT's requirements for operating the plant as an intermediate peaking station, limiting floods in the XBF basin to not more than histori- cal levels, and even stopping power generation when flooding of the XBF i s imminent. In regard to the very large downstream channel, the cheaper alternative of using the Nam Kathang River, which would have required resettling about 15 percent of the people living along the riverbanks, was discarded in favor of the Nam Phit River whose banks are largely unpopulated. The channel i s now to be lined with concrete at considerable cost to safeguard against erosion of its sides over time. The geotechnical site investigations and testing have been undertaken by agencies recog- nized internationally to have both extensive and in depth state-of-the art expertise in this field. EDF carried out a comprehensive review (1996) of plate tectonic and structural geologic data related to earthquakes that could be expected at the site, which i s in a relatively quiet seismic region. The analysis concluded that there i s no evidence o f historic movement on any of the nearby faults. The DSRP reviewed EDF's analysis and concluded that the values 48 are well researched, based on sound geologic interpretation of available data, and are ap- propriately conservative for use as a basis for selecting seismic design criteria for the pro- ject. The potential for the Nakai reservoir to trigger seismic events due to changed loading conditions on local tectonic features cannot be ruled out completely. However the magni- tude of such events cannot be higher than those associated with historical tectonic move- ments, because the reservoir loading can change local stress distribution at limited depth, but it does not addenergy to the system. 0 With regardto the transmission system for NT2, the 500 kV systempresents standard chal- lenges. Underpinning this system are feasibility studies carried out by SMEC and detailed design studies undertaken by EDF jointly with EGAT. All three organizations are well versed in state-of-the-art international best practices at the 500 kV voltage level. The mod- eling work, for system steady state and transient stabilities, short circuit levels, load flows and transient and steady state voltage profiles, has been accomplished using internationally recognized models. In conclusion, the 500 kV system for NT2 i s considered to conform to best international practice. D.3 Fiduciary 123. Project Financial Management, Audit and Reporting. All entities supported by the pro- ject will be subject to annual audit by qualified auditors acceptable to theBank. NTPC will maintain an accounting and cost control system, management information system and books of account and other records in conformity with internationally accepted accounting principles. NTPC's performance will be monitored through regular reports and the review of audited annual accounts. All entities supported b y the project will prepare quarterly progress reports on techni- cal matters, including financial information appropriate for their operations. Annual reports will be audited within six months of financial year end. These reports will be reviewed by consultants contracted to carry out periodic supervision of the project. Routine monitoring reports will be made publicly available throughout the life of the project in the Project Information Center of NTPC and through STEA. 124. Project Procurement. A detailed review of project procurement was carried out by an independent and reputable firm and Bank experts to review the reasonableness of the project costs and the conformity of the procurement arrangements with Bank procedures. The review concluded that despite sole-source procurement of the HCC and the largest C W contract (CW1) from shareholders (EDFI and ITD, respectively) in NTPC, there was adequate competition for the other two civil works subcontracts and for the two electromechanical subcontracts and that the prices of all six contracts were generally consistent with prices that mighthave been expected from greater competition. The cost of the management services and risk premium components of the HCC are generally acceptable. Negotiations between the head contractor and the subcontrac- tors and the other shareholders in NTPC to finalize the HCC are ongoing and are expected to conclude shortly. The Bank's review has concluded that the procurement process and results are consistent with Bank procurement guidelines for guarantee operations, which require that goods and works have been procured with due attention to economy and efficiency, that they are of sat- isfactory quality, that they are delivered in a timely fashion, and that they are priced so as not to affect adversely the economic and financial viability of the project. Details of the procurement review are provided in Annex 10A. 49 125. NTSEP Financial Management. NTPC will be the primary implementing entity for the NTSEP and will be responsible for project financial management which includes accounting, financial reporting and audit. NTPC's financial management arrangements and system have been assessedas adequate and responsive to Bank requirements. The current chart of accounts i s being extended to capture NTSEP project transactions, by component and expenditure category, and to generate quarterly Financial Monitoring Reports (FMRs). NTPC FMR-based disbursement and special account arrangements have been finalized with NTPC and M O F and the format of the quarterly FMR has been agreed upon. The FMR will serve purposes o f both grant disbursement and monitoring of NTSEP project progress. The annual financial statements of NTPC will dis- close separately the NTSEP project financial operations, resources and expenditures. They will be audited by an auditor acceptable to the Association and the audited financial statements will be submittedto the Association within six months of the close of the financial year. 126. NTSEP Flow of Funds. The NTSEP project will use the report-based disbursement method with a separate Special Account at the Bank of Lao PDR. The M O F has confirmed that NTPC will be given sole authority to make withdrawals of funds from the Special Account for eligible expenditures. NTPC will submit withdrawal applications, expenditure forecasts and F M R s through the M O F to the Bank for replenishment of the Special Account. NTPC will for- ward copies of the quarterly FMRs, withdrawal applications and six-monthly expenditure fore- casts to GOL's LHSE.In accordance with the NTPC Shareholders' Agreement, NTPC will issue shares in NTPC to the LHSE promptly following NTPC's receipt of funds drawn from the Spe- cial Account for NTSEP-eligible expenditures. 127. NTSEP Procurement. Since NTPC i s a private company, it has far more flexibility than a typical GOL agency implementing an IDA project. It i s exempt from G O L regulations included inPrime Minister Decree 3 of 2004, while at the same time it has no prior experience inthe use of Bank procurement guidelines with regard to the NTSEP expenditures. The following pro- curement arrangements have been agreed to: (i) Bank Guidelines, Standard Bidding Documents andRequests for Proposals will be applicable to international competitive bidding (ICB) and in- ternationally competed consultancies; and (ii) procurement of goods and works through NCB for and NS and for the selection of consultants through national competition, detailed procedures laid out in Sub-decree No. 0 3 P M (dated January 9, 2004) and the Implementing Rules and Regulations (dated March 12, 2004) will be followed. Both complement Bank Guidelines. The applicable draft national standard bidding documents and national standard "Request for Quota- tions" developedby the Ministry of Finance will be used for NCB and NS, respectively. The on- going Procurement Capacity Assessment (PCA) has identified the following issues: (i) the com- pany's current procurement procedures will need to be adjusted to be aligned with Bank re- quirements, including the preparation of a procurement manual for NTSEP that will be part of the PIP; (ii)an additional staff member will need to be recruited after financial closure to be re- sponsible for NTSEP procurement; inthe interim, NTPC will seek the services of an experienced EGCO staff member; the Bank will assist NTPC in staff training; and (iii) NTPC will ensure that any reorganization of its structure will not affect the functioning of NTSEP's procurement activi- ties, and that there i s prior consultation with the Bank. The procurement plan for NTSEP-funded activities has been finalized and agreement has been reached with NTPC on the procurement plan and on an action plan to implement the findings of the PCA. 50 D.4 Social 128. The main areas of impact of the project are the Nakai Plateau, the NT2 Watershed (com- prising the NNTNPA and two adjoining Corridors), the downstream Xe Bang Fai, includingits tributaries and hinterland; and the downstream Nam Theun and its tributaries. Social impacts, mitigation and compensation measures are summarized below and detailed in Annex 12 and in the safeguard documents. 129. Nakai Plateau. The communities on the Nakai Plateau belong to five main ethno- linguistic groups: Brou (40 percent); Tai B o (40 percent); Upland Tai (11percent); Vietic (6 per- cent) and Sek (1percent). Social surveys have revealed that, over the past 200 years, distinctions between these groups have become blurred, and a common culture, religious beliefs and liveli- hood systems has tended to emerge. The communities are dependent upon "swidden" (shifting cultivation) farming, and on hunting and gathering of timber and non-timber forest products, fishing, livestock and wage income. It is estimated that only 17 percent of the families can pro- duce sufficient rice for the year and 50 percent have a rice deficiency for more than six months per year. Average household income (bothcash and imputed) on the plateau i s US$450 per year, well below the national poverty line of US$SOO per year. Agricultural production is constrained by poor soils, adverse weather conditions, lack of access to markets and lack of modern farming techniques. 130. The project will require the relocation of approximately 17 villages comprising about 6,200 individuals in 1,128 households, predominantly ethnic minorities. The resettlement pro- gram detailed in the SDP aims to improve the lives of displaced villagers through livelihoods programs that include community forestry, reservoir fisheries, household gardens, irrigated rice farming, and livestock husbandry. NTPC i s committed (and bound by the CA) to achieve a householdincome improvement target -higher than the national poverty line (US$SOO in 2002) inyear 5 after relocation. Further, both the GOL and NTPC have committed to achieving an am- bitious "best endeavor" target for each household, on average, at village level to meet the na- tional rural income level (US$1200 in 2002) in year 9. The Resettlement Action Plan (RAP), de- veloped with the participation of the affected population, also provides (in addition to the livelihoods programs) land, housing, infrastructure, and social services, and includes measures to assist ethnic minorities and other vulnerable households in culturally appropriate ways. The con- sultation process, described in Annex 13, informed and influenced the design of the program, and will continue as the project proceeds, informing the detailed design and early stages of pro- gram implementation. The relocation and livelihoods programs will be front-loaded to allow op- portunity to assess the adaptation of resettlers to new conditions and to adjust the programs as needed. 131. NT2 Watershed (Nakai Nam Them National Protected Area and two adjoining corri- dors). About 5,800 individuals, 90 percent belonging to indigenous Brou, Phong, Kri and Sek groups live in the watershed area. The Peripheral Impact Zone (PIZ), north, south andwest of the NPA, includes 52 villages, of which two are Hmong villages of nearly 300 households. These communities depend on subsistence livelihoods and have household income levels well below the national poverty line. Most villages practice shifting cultivation and collect non-timber forest products, including wildlife. They have limited access to infrastructure and social services such as health andeducation. These populations will not be displaced but may see their access to natu- ral resources restricted as a result of conservation plans for the watershed. Communities and in- 51 dividuals may be adversely affected by improved enforcement of existing regulations, such as those concerning wildlife hunting, as well as by the introduction of new land and resource use patterns which may impose spatial and temporal resource access restrictions in some cases. 132. Under the watershed development strategy, articulated in the SEMFOP, protection and conservation objectives would be carefully reconciled with the development aspirations of wa- tershed populations ensuring that they benefit from and support the program. It i s foreseen that they will benefit from enhanced land andresource use rights, improved livelihoods through natu- ral resource management activities, and improved access to basic services such as water supply and sanitation, health facilities and schools. Natural resource use arrangements will be agreed with the respective villages and any adverse impacts will be compensated through livelihood and community development activities. Additionally, measures will be taken to address these issues in a culturally appropriate way and ensure informed participation of all groups. The principal planning methods that will be utilized, known as Forest and LandUse Planning and Management (FLUPAM) and Participatory Protected Area Management (PPAM), will involve iterative con- sultations between NPA management authorities and enclave communities. This process builds on experience in the Lao PDR and elsewhere in the East Asia region, and i s seen as a long term, continuous activity which will be a foundation for management of the NPA with potential repli- cability inother protected areas inLao PDR. 133. Xe Bang Fai. The communities in the XBF floodplain areas are largely dependent on paddy rice cultivation, livestock rearing, fishing and wage income. They have an average house- hold income of about US$660 per year and approximately 40 percent of the population lives be- low the national poverty line. Most of the population i s from the Lao ethnic group; however, there are also some ethnic minorities. 134. Once the power plant becomes operational in 2009, approximately 40,000 people could potentially be directly affected b y the changes inthe flow regime inthe XBF, which will result in lower fisheries productivity and inundation of physical assets, such as water supply systems, irri- gation pumps, and river crossings, riverbank gardens and other productive lands. N o physical displacement i s required. An additional 30,000 people living near or along tributaries to the XBF may also be adversely affected to varying degrees through reduced access to river fisheries. The SDP includes provisions for asset replacement and restoration of livelihoods, developed in con- sultation with these communities. It will be detailed during implementation through a participa- tory planningprocess. 135. Nam Theun. The river banks along the Nam Theun River between the Nakai Dam and the Theun Hinboun Dam, located downstream, are not inhabited. However, some nearby vil- lages, located on Nam Theun tributaries, use the river for fishing to varying degrees. Representa- tive local consultations have been held with 15 of the 40 potentially affected villages, and these are beingcontinued by NTPC. A livelihoods restoration program, similar to that proposed for the XBF, has been developed for the affected communities in this area, and the consultations have confirmed that the communities are receptive to the mitigatiodcompensation options proposed. They will be actively involved in designing and implementing the program. It should be noted that the existing mining activities in one of the Nam Theun tributaries, the Nam Kata, has already damaged fish habitats and villages are reporting lower yields. 136. Other Social Impacts. The project will also impact a number o f households living in ar- eas where construction of project ancillary works (such as the downstream channel, quarry sites, 52 transmission lines, powerhouse and work camps) will take place. Compensationfor land acquisi- tion, resettlement of about 90 households, and impacts on livelihoods inthese "project lands" are provided for through RAPSand resettlement frameworks in the SDP. 137. Other project social issues include the establishment of large construction camps of ex- ternal workers and the attraction of camp followers, resulting in an additional population on the plateau of up to 20,000 people during the construction phase. If not addressed, this influx may lead to a range of social problems such as crime, prostitution, public health problems, public safety, conflict with host communities, increased land speculation and spontaneous growth of existing settlements. A Construction Phase Social Management Plan has been developed and in- cluded in the SDP. This plan provides an analysis of the estimated size, origin and timeframe of the construction force and the camp-follower groups, and likely associated impacts. It also de- fines mitigation measures, institutional responsibilities and budget. Planned mitigation measures include the establishment and strengthening of district agencies; upgrading of urban planning of Gnommalath and Oudumsouk towns, taking into consideration the additional needs of the influx population; infrastructure and public services provision such as water supply and sanitation fa- cilities; public health monitoring system and programs; local recruitment for construction posi- tions; population registration and management; traffic safety and transport improvement pro- grams; and public monitoring and information campaign against human trafficking. These programs are indicated in the SDP and the Head Construction Contractor's Environmental Man- agement and Monitoring Plan (HCCEMMP) and will be further developed and designed during implementation. Further details can be found in Annex 12. 138. Addressing gender issues has been an integral part of the project design. A gender as- sessment found that women and girls, particularly those from certain marginalized ethnic groups and those living within disadvantaged household are the most vulnerable and over-burdened so- cial group amongst potential resettlers, with limited access to education, off-farm employment, production markets, cash assets, and socio-political empowerment. They face greater risks in the resettlement process and will require continual and intense attention and support. A Gender Strategy and Action Plan has been developed and incorporated within the SDP as mainstreamed gender-sensitive actions or women-specific actions. These include: identification of gender- specific impacts and issues; gender-sensitive and participatory planning, monitoring and mitiga- tion mechanisms; promotion of gender-balanced project community institutions; gender-sensitive opportunities for income generation and skills development, training and off-farm work opportu- nities; community education on Sexually Transmitted Infections, including HIV/AIDS, alcohol- ism and spouse abuse; actions to enhance the empowerment and skills of women; establishment of gender-sensitive and balanced project institutions, with a gender advisor position in the RMU. The above are detailed in the Gender Action Planinthe SDP. 139. Programs to monitor and evaluate project progress will be carried out at several levels and various monitoring reports will be made available to the public (details are provided in An- nex 5B). The Bank reached agreement with G O L and NTPC on the involvement of local mass organizations and international operational NGOs inproject implementation. Areas of the project where this i s expected include the delivery of basic services (such health and education in the resettlement area, the watershed and downstream areas), implementation of conservation pro- grams (including patrolling and monitoring in the NPA), capacity building o f Lao agencies, and independent monitoring of progress. 53 D.5 Environment 140. The adverse environmental impacts of the NT2 project result from impoundment of the Nam Theun to form a large, 450 sq. km, seasonally variable reservoir; the inter-basin transfer of water from the Nam Theun to the XBF with associated changes in flow patterns and aquatic ecology; and the construction of project ancillary works. Environmental impacts, mitigation and compensation measures are summarized below and detailed in Annex 12 and in the safeguard documents. 141. Nakai Plateau. The plateau has a forest cover of approximately 60 percent. The quality of the remaining forest on the plateau i s variable, ranging from undisturbed to highly disturbed. A natural habitats accounting assessment has been prepared for the project which details the for- est types which would be lost due to inundation. Although it has been under pressure for many years, it still contains populations of animal species important from a conservation perspective, including the Asian elephant, the white-winged duck and several other bird species. There are significant tracts of contiguous forest area, especially on the Northeast side of the plateau, near the dam. A complete description of affected forest types and the chronology of logging on the Nakai Plateau i s provided inthe EAMT. 142. The major environmental impacts of the project on the plateau are related to natural habi- tat loss and the implications for wildlife. This loss of natural habitats, along with impacts on natural habitats in other parts of the project area, will be mitigated and compensated through di- rect interventions, such as wildlife and reservoir management programs on the plateau, as well as through the protection of the NT2 Watershed, as described below. In addition to the watershed offset, the environmental management program includes programs to address species of special conservation significance. Specifically, the EAMT supports initiatives to develop and implement directed conservation programs for the white-winged duck and for the Asian elephant. These ini- tiatives include financial support for new surveys, management measures, public education and conservation awareness raising. 143. NT2 Watershed.The watershed is comprised of the NNTNPA and two corridor areas linking it to the Phou HinPoun NPA to the west and the HinNam N o NPA to the south. These are part of the Central Annamite region, an area of national and international biodiversity impor- tance. The NNTNPA itself has been recognized by international conservation and scientific or- ganizations as one of the most significant conservation areas remaining in Southeast Asia. It i s noted for the quality and diversity of ecological habitats and i s known to include important re- maining populations o f many rare, endangered and vulnerable species. The watershed area i s contiguous with important conservation areas on the Vietnamese side of the border and, thus, also presents important trans-boundary conservation opportunities. Its protection would ensure stability of livelihoods for those ethnic groups that rely on the forest resources and would also ensure the viability of its international conservation status. The practice of conservation in the Lao PDR has suffered from a range of problems relating to insufficient funding, weak technical capacity, and limited emphasis on enforcement. Duringthe 199Os, commercial logging occurred inthe Nakai Plateau, which at times extended into the NPAcausing a degradationof the resource base. Preparation of the project caused the GOL to enforce a logging ban in the area. 144. NTPC will provide US$31.5 million over a 30-year period for the protection of the NT2 Watershed. The SEMFOP, covering the first eight-year period o f the project, was recently ap- 54 proved by the Board of the WMPA. SEMFOP lays out a vision for the watershed's long-term development, establishing principles for its management, and detailing programs to be carried out, including village-basedparticipatory land use planning, alternative livelihoods development, monitoring and enforcement. Since the WMPA i s a new agency, the SEMFOP foresees an insti- tutional strengthening program, including training for staff, in-house, full-time TA by interna- tional professionals, and support from operational NGOs for monitoring, patrolling and village planning, which will be inplace before the start of project implementation. 145. Xe Bang Fai. The river i s actively used to provide water for irrigation and for fishing, and has overall good water quality, with adequate dissolved oxygen and low levels of turbidity to support these uses. The project, after COD, is expected to have a significant impact on aquatic habitats and fisheries through flow changes (including doubling the average annual flow and changing the variability in weekly and seasonal flow), increased erosion, and changes in water quality. In addition, the potential for flooding will increase. Measures to reduce the environ- mental impacts include specially designed aeration structures, a regulating pond, river bank pro- tection, including possibly dykes in the lower segment of the river, and reservoir operating rules that will reducehtop operations during periods of flooding on the river. 146. Nam Theun.The area downstream of the dam on the Nam Theun River i s affected most significantly between the Nakai dam and the Theun Hinboun dam. This area i s not inhabited but i s used by nearby fishermen. It also has value in terms of wildlife as it forms part of the Nakai Nam Theun-Phou Hin Poun Corridor. The project will significantly reduce the average flow of the river in this area, thus changing fish habitats, some riparian vegetation and potentially its use by wildlife. Mitigation measures include outlet structures to reduce water quality impacts and a fish species monitoring program. Additionally, provisions have been made for a guaranteed ri- parian flow regime andin-stream landscaping. 147. Other Environmental Impacts. There will be additional impacts related to the construc- tion of the powerhouse, the dam, and ancillary works, including transmission lines, roads and work camps. Most are located in populated areas or areas with degraded habitats, and current baseline environmental conditions in these areas, such as air and water quality, are all very good. The potential adverse impacts include erosion, dust, noise, water quality, vegetation clearing and increased pressure on biodiversity due to the large worker population. Mitigation measures have been identified and included as part of the obligations of the HCC. 148. Monitoringof environmental commitments under the project will be carried out at several levels. Monitoring proposals call for intense day-to-day oversight of the construction sub- contractors by the HCC, NTPC and GOL. In addition, the project will include provisions for monitoring by external agencies including the POE, IAG, LTA and IMAs. D.6 Safeguard Policies 149. Applicable Safeguards Policies and Environmental Category. The project i s rated as a Category `A' operation in accordance with the Bank's environmental screening procedures, and triggers all ten safeguard policies. The relevance of Bank policies to the project and key meas- ures taken in response are detailed in Annex 12. 150. Supporthzg Safeguards Documentation. Detailed descriptions of the project's baseline environmental and social conditions, probable adverse impacts and benefits, and detailed envi- 55 ronmental and social management plans, including institutional responsibilities, timelines, moni- toring and evaluation arrangements, and budgets, are described in a set of three core safeguards documents: (i) the Environmental Assessment and Management Plan (EAMP); (ii)the Social Development Plan (SDP), comprising both the Resettlement Action Plan (RAP) and the Ethnic Minority Development Plan (EMDP) for the plateau, the downstream areas and project lands; and (iii)the Social and Environment Management Framework and First Operational Plan (SEMFOP) which covers the NT2 Watershed. These documents are supplemented by an array of other supporting pieces of analytical work and management plans, including: the Strategic Zm- pact Assessment (SZA), the Cumulative Impact Assessment (CIA), and the Head Construction Contractor'sEnvironmental Management and Monitoring Plan (HCCEMMP). 151. A brief description of all of the above documents i s also presented in Annex 12. In addi- tion, the findings and recommendations of the suite of supporting documents are summarized in the SESIA. A complete set of safeguard documents can be found in the Bank's InfoShop and in Project Information Centers in Thakek and Nakai, as well as in Vientiane and Bangkok. All documents are also available on the N T 2 project website maintained b y NTPC. 152. MIGA has the ability to terminate coverage, or deny a claim under the MIGA Contract, solely on the basis of the Guarantee Holder's failure to comply with environmental and social requirements specified in MIGA's Contract. In the case of the shareholder in NTPC as MIGA's Guarantee Holder, it i s the failure of NTPC to comply with its obligations; in the case of a lender as MIGA's Guarantee Holder, it i s the failure of the lender to exercise reasonable actions to cause NTPC to comply with its environmental and social requirements. Key Safeguards Issues 153. Resettlement and Livelihood Restoration of Affected Persons on the Nakai Plateau. Although the SDP i s backed by extensive analytical studies, field work and local consultations, some risks remain regarding the robustness of the proposed livelihoods program. To test the ro- bustness of the design of the resettlement program, the GOL and NTPC relocated three hamlets of 30 households at the end of 2003. The households were provided with housing, water, elec- tricity, roads, and basic services, and support (in the form of skills and agriculture inputs) was provided for them to practice the livelihood models - irrigated agriculture, livestock, forestry and labor payments. Lessons from this pilot resettlement are being used by NTPC to refine the pro- gram design. The long-term success of options such as reservoir fisheries and community for- estry, while technically feasible, depend on market availability and social organization of com- munities and thus are subject to some uncertainty. 154. It is anticipated that the livelihoods programs will evolve over time during implementa- tion. The project has adopted a participatory process for detailed resettlement planning, design and implementation to allow for greater flexibility and to respect the experience, choices and preferences of the affected people. Villagers will work together with project staff and specialists in designing household and village livelihood activities to ensure ownership and smooth imple- mentation. The SDP (and amendments to the Concession Agreement) includes provisions for flexible design, clear allocation o f responsibilities for livelihood outcomes, adequate funding and contingency resources. The resettlement program will be "front-loaded" as much as possible, to ensure piloting of mitigation measures, monitoring and evaluation, and adjustment. 56 155. Protection of the NNTNPA and the NT2 Watershed.The success of the proposed con- servation offset for the NT2 Watershed will depend upon the effective use of financial resources, strengthening government capacity to successfully implement programs, and long-term political will to conserve the resources of the watershed. In recent years, the G O L has demonstrated its commitment to conservation by eliminating logging in the protected area, establishing the pro- tected forest corridors between the NNTNPA and two adjacent protected areas, demarcating the boundary where the NT2 Watershed abuts the PIZ according to best practice and participatory methods, and changing the concession area of a gold mining operation in the PIZ which extended over the (unmarked) boundary into the NNTNPA. However, the continued hunting of wildlife and harvesting o f non-timber forest products from within the NPA and across the borders, and the poor conservation performance of the GOL in other protected areas, indicate that there are still serious risks to be addressedto ensure achievement of the project's conservation goals. 156. In addition to securing the financing through the CA, a vision for the conservation and protection of the N T 2 Watershed has been developed by the GOL. This long-term management vision, detailed in the SEMFOP, has been developed directly with the government and i s sup- ported by Decree 25, first issued in 2002, and amended as Decree 39 on February 21, 2005. Ac- tivities such as baseline surveys of biodiversity, strengthened patrolling with a focus on cross- border wildlife trade, an institutional strengthening program for the WMPA, relying on external support of operational NGOs and on full-time, in-house technical assistance by international staff, have been designed and will begin once the project reaches financial close. 157. Mitigation of Downstream Zmpacts in the Xe Bang Fai. The hydrologic changes in the XBF, combined with expected changes in water quality, are expected to cause a variety of ad- verse impacts on fisheries, water use, riverbank gardens and potential for flooding. Recognizing the nature, scope and time implications are difficult to model with precision, the project will put in place a continuous monitoring program during implementation. Also, NTPC and GOL will implement a proactive and flexible mitigation and compensation program covering impacts on riverbank gardens; irrigation facilities, crossings, and potential flooding, soon after financial clo- sure. Loss of fisheries will be compensated by a comprehensive menu of livelihoods options, to be tested well ahead of COD when impacts on the downstream areas will occur. 158. Total costs for downstream mitigation programs are currently estimated at US$16.0 mil- lion. Detailed planning of the specific options to be adopted in each village will be undertaken during the initial years of project implementation. It is expected that about half of the livelihoods compensation program in the downstream areas will be completed before COD with the remain- der coming after operation starts. 159. Mitigation of Downstream Zmpacts in the Nam Them River. The scope of NT2 project liability for impacts in this area, which contains an existing hydropower project (Theun Hinboun Hydropower Project) and a proposed hydropower project (Theun Hinboun extension) has been clarified. GOL has confirmed that the NT2 project would be liable for impacts between the NT2 dam and the reservoir of the Theun Hinboun project which i s downstream. NTPC has completed preliminary surveys through the downstream area (mainstream and tributaries o f the Nam Theun) that have determined that up to 40 villages could be affected in varying degrees due to reduced fish catch in the Nam Theun itself as well as potentially reduced fish catch in tributaries, result- ing from impacts on fish migration. It is important to note that not all villages will be impacted in the same manner. For those villages that rely on the Nam Theun itself (about 25 percent of the 57 total) fisheries impacts would be significantly higher than for those villages that live along tribu- taries of the N a m Theun. Based on initial assessments, villages relying on the NamTheun could expect fish catch loss in the range of 35 to 60 percent per year. Villages living along tributaries would expect fish catch loss inthe range of zero to 35 percent. 160. For the impacts for which it i s liable, NTPC has prepared an impact assessment and a compensation and mitigation program similar to the XBF, as well as management options for the flow released from the dam. Impacts beyond the scope of the NT2 project will be dealt with by GOL inthe context of an integrated river basin management program, covering the set of hydro- power projects and other developments foreseen in the basin. The GOL has requested support from the Bank for such a program, includingpossible creation of a river basin authority, through the LEnS project which i s at an advanced stage of preparation. 161. Mitigation and Management of Construction-Related Impacts. Management of con- struction site impacts will be the responsibility of the HCC. The plans for construction site man- agement include: an HCCEMMP framework document and model guidelines for impacts such as soil disposal, waste management and vegetation clearing. For each construction site, Site Spe- cific Environmental Plans (SSEP) will be developed, spelling out contractor responsibilities in each of the areas. Supervision and monitoring programs will be essential to ensure the success of the detailed plans. Detailed implementation arrangements and responsibilities for M&E are pro- vided in Annexes 5 and 6, as well as in supporting environmental and social action plans. 162. Riparian Issues. In accordance with the Bank's Policy for Projects on International Wa- terways (Operational Policy 7.50), notification to riparian countries has been carried out. In the case of countries that are members of the 1995 Agreement on the Cooperation for the Sustain- able Development of the Mekong River Basin (Thailand, Cambodia and Vietnam) letters dated September 2001 and October 2003 from the GOL were forwarded through the Mekong River Commission Secretariat. The Secretariat also discussed the project within its Joint Committee, which i s comprised of high ranking representatives from the Governments of all riparian coun- tries. N o concerns were raised in these discussions. In addition, direct notifications were sent to the People's Republic of China and the Republic of Myanmar, countries which are not parties to the 1995 Agreement. Inthe notification letters, the Lao PDR Government indicated that the NT2 hydropower project would not result in any substantial change to the discharge pattern in the Mekong River and provided copies of technical drawings and the design of the proposed dam and hydropower plant. In addition, in 2004, a CIA was conducted, disclosed and made available to the M R C Secretariat and riparians. 163. Following the notification process described above, the GOL has received: (i) a no- objection letter from Vietnam (dated February 18, 2004), (ii) support for the Nam Theun 2 pro- ject from Thailand (letters of January 14 and 16, 2004) (iii)a no-objection letter from China (dated October 23,2003); and (iv) a no-objection letter from Myanmar (dated October 30,2003). The Kingdom of Cambodia raised initial concerns and requested the Lao PDR Government to prepare additional studies before it would be in a position to provide its final response to the no- tification. The Government provided additional information, including a copy o f the CIA. Through a letter dated December 22, 2004, the Cambodia National Mekong Committee advised the GOL that it was satisfied with the additional information provided and, consequently, pro- vided its no-objection to the project. 58 164. Disputed Areas. The policy on Projects inDisputed Areas (OP 7.60) i s triggered because the power transmission line crosses the Mekong at a point where the borders of Lao PDR and the Kingdom of Thailand are not yet demarcated. The first design of the project included building a suspension tower for the transmission line on a small island. Sovereignty over the small island in the middle of the Mekong River i s disputed between the two countries. To avoid border issues, it was agreed that suspension towers will be built on each bank of the Mekong. This i s reflected in the PPA endorsed by both the GOL and the Kingdom of Thailand. The Ministry of Foreign Af- fairs of the Government of the Kingdom of Thailand has confirmed this through a letter dated January 16,2004. 165. Ensuring Consistency Across Financial Institutions. The involvement of such a large number of diverse financial institutions (IFIs, bilateral donors, ECAs and commercial banks) in the financing of the project has had a positive effect on enhancing the structures being put in place for safeguards, principally because each of these institutions, while looking to the Bank for leadership, i s also interested in ensuring that its own environmental and social safeguards poli- cies and guidelines are adhered to by NTPC and GOL Accordingly, it was agreed that in an ef- fort to harmonize the various institutions' standards, a schedule to the Common Terms Agree- ment (CTA) between the commercial lenders and NTPC (Schedule 11) would be added to ensure that NTPC adheres to and implements the policies and guidelines of the Bank and other institu- tions, including by preparing an overall PIP (derived from Schedule 4 to the CA) and Annual Implementation Plans (derived from Schedule 4 and the PIP and detailing actions to be taken each year), and Additional Plans (detailing plans that are not currently known but that will or may be required in future, e.g. as a result of downstream impacts).38 166. Also as part of this extended effort to ensure compliance, as well as harmonization, of the several safeguards policies, Schedule 11(Part 3) requires that NTPC will covenant to ensure that the design, construction, operation and maintenance o f the project, and the conduct of the pro- ject, i s not inconsistent with all of the Applicable Environmental and Social Safeguard Policies and Guidelines. At the same time, the various institutions, including World Bank, recognized that their several environmental and social safeguard policies and guidelines, while to a very great extent similar, are not identical in format or sometimes intext. Thus, it was also determined that in the event that the requirements under an Applicable Environmental and Social Safeguard Policy or Guideline conflicts with another Applicable Environmental and Social Safeguard Pol- icy or Guideline, the POE will act independently and in a manner to determine which policies or guidelines best protects both the environment and the interests of those affected by the project impacts. It also should be noted that World Bank and other IFIs, while not direct parties to the CTA, nonetheless have been given explicit legal rights as third party beneficiaries to enforce their rights under, and to ensure NTPC compliance with, Schedule 11o f the CTA. Implementation Arrangements 167. Borrower Capacity to Implement Safeguards Management Plans. While the GOL has basic legislation and regulations in place and has shown a willingness to refine and fill in gaps in ~ 38 The CTA defines "Applicable Environmental and Social Safeguard Policy or Guideline" to include the Equator Principles as well as the policies and guidelines with respect to environmental and social issues of the ADB, COFACE, MIGA and World Bank. The "Applicable Environmental and Social Safeguard Policies and Guide- lines" means all of them. 59 such regulations, implementation capacity remains weak. It has had limited responsibility for similar safeguard programs and its track record in previous hydropower projects i s poor. The Hydropower Office, now part of the Department of Electricity of the MIHhas not invested heav- ily in the past in building strong environmental or social units within its organization; the STEA and the WMPA are relatively new agencies, and provincial authorities in charge of resettlement are poorly staffed. The EAMP and the SDP both contain provisions for strengthening govem- ment units that have been established to manage safeguards but development of the necessary skills will take time. For the purpose of implementing the NT2 project, the social and environ- mental obligations will rest predominantly with NTPC. Inthe case of the WMPA, additional re- sources will be provided in the form of in-house consultants to support day-to-day activities and operational NGOs to assist with planning, monitoring andenforcement. 168. Allocation of Responsibility between GOL and NTPC. NTPC will assume significant responsibility to provide adequate management skills, ensure appropriate funding for mitigation programs, and ensure that outcomes of environmental and social mitigation programs are achieved. The C A specifies that NTPC and GOL will work in close partnership and defines the division of labor between GOL and NTPC in the design and implementation of social and envi- ronmental safeguards programs. 169. NTPC will assume full responsibility for civil and electromechanical works. It will have shared responsibilities with GOL (as a shareholder of NTPC) for implementing the social and environmental programs on the plateau and in the downstream areas. NTPC will contractually obligate the Head Contractor, civil contractors and subcontractors to implement environmental and social mitigation measures under its guidance. It will also assist the RMU and the EMUin carrying out those activities of the SDP and EAMP which have been attributed to GOL agencies, on the basis of arrangements that will be reviewed at the time of preparation of each Annual Work Plan and, as needed, inthe course of the year. It i s envisaged that the role of GOL agencies will increase as project implementation proceeds and their capacity i s strengthened. For the Wa- tershed, GOL will implement the SEMFOP through the WMPA. WMPA will work in close co- ordination with sectoral agencies and district authorities. NTPC will provide the financing for SEMFOP implementation and will carry out procurement and financial management activities on behalf of WMPA. GOL will have exclusive responsibilities for activities such as landtitling and enforcement o f regulations applicable to any aspect of the project. The respective responsibilities of NTPC and GOL have been laid out in the C A and the DGA. 170. Stakeholder Consultation.The GOL and NTPC have conducted a large number of for- mal and informal discussions in the course of project preparation, including consultations with affected people, open public workshops with a diverse set of national and international stake- holders, formal and informal meetings with donors (including through the GOL led and UNDP- supported Round Table Mechanism), and focus group discussions with NGOs and other inter- ested parties. The approach has comprised activities at the local, national, regional and interna- tional levels, and has also included study tours and site visits for international media and NGOs, translation of documents into Lao (andin the case o f the SESIA, into Thai and Japanese), use of posters, charts and pictures to explain the project, and the postingo f project information on web- sites. More information on the overall approach to consultation and disclosure i s provided in An- nex 13. 60 171. Local consultations with affected people have been undertaken since 1996. InMay 2004, a comprehensive round of detailed public consultations with affected villages was initiated to seek further guidance from affected people on the scope of impacts, proposed mitigation meas- ures, entitlements, dispute resolution mechanisms, monitoring, and roles and responsibilities. Key elements o f this most recent round of consultations have been the efforts to make informa- tion transparent, balanced, meaningful and accessible to affected communities, in local language and in forms that are easily understood. Outreach to these affected groups was extensive, with only a fraction of very remote villages not yet covered. Consultation techniques at the local level used a number o f best practice methodologies, such as visual representations, diagrams, posters and maps, face to face communication in local languages, and small group discussion in addition to larger plenary sessions. Key written documents were translated into the Lao language and made available through public information centers. This process was coordinated by an experi- enced Thai consultant, who trained facilitators and followed the process throughout. The consul- tations were also observed by an independent expert, well acquainted with the area and the Lao language. Both have attested to the unprecedented level of transparency and participation achieved. 172. The local level consultations were supplementedby a national workshop heldin Vienti- ane in September 2004. This provided an opportunity for national debate about the project ra- tionale and objectives, scope of impacts, and mitigation measures. In addition, the project propo- nents carried out international stakeholder workshops in Bangkok, Tokyo, Paris and Washington, D.C. to provide opportunity for concerned groups around the world to clarify questions and ex- press their views on the project. Direct contact with national and international stakeholders also occurred usingmedia such as newspapers, television, radio and site visits. 173. The local consultations and international public workshops have led to a number of de- sign changes being incorporated into the mitigation programs. Some specific examples are as follows: project works have been sited so as to minimize resettlement and environmental im- pacts; resettlement sites have been chosen in response to preferences expressed by the affected population on the plateau; a regulating pond has been included in the overall scheme and will be operated in a way which minimizes daily fluctuations in water flow in the downstream XBF area; aeration structures are being included to improve water quality in downstream channels; and the powerhouse and reservoir will be operated so as to limit natural over-bank flooding in the XBF. An adaptive management program has been introduced, based on extensive monitoring and adjustment of program design as needed during implementation. 174. The local consultation process has confirmed general community support for the project and for a diverse package of livelihood options and other mitigationkompensation measures. It has documented local preference with respect to sensitive cultural sites such as spirit forests, and has helped to identify local priorities in areas such as flood protection, electricity supply, fisher- ies, etc. The consultations also helped clarify rights and responsibilities of various stakeholders and will improve the transparency of resource utilization throughout the project implementation period. The SDP includes provisions for continued involvement of local stakeholders during pro- ject implementation through a communications/consultation program, and a participatory plan- ning approach. Duringproject implementation, GOL also plans to use the Round Table Mecha- nism, as well as periodic workshops at the national and international level, to keep concerned stakeholders informed and enable exchange of information and discussion of the project. 61 Public Disclosure of Safeguards Documents 175. Safeguard documentation has been disclosed in accordance with World Bank require- ments. Documents were progressively posted in the public information center of STEA and in NTPC offices in Vientiane, Nakai and Thakek, as well as in the Bank Office in Bangkok and the InfoShop in Washington, D.C. Documents have also been posted on the NTPC website, begin- ning in May 2004. Concurrently, disclosure of project information in the form of posters, bro- chures and presentations has been carried out as part of the local consultations which began in May 2004, and the international workshops that took place from August to September 2004. (Annex 13 provides detailed information on disclosure). The Panel of Experts (POE)and International Advisory Group (IAG) 176. Significant project oversight has been, and will continue to be, provided b y the POE and the World Bank's IAG. In particular, the POE will have an important role in quality assurance and oversight. The POE's role vis-&vis NTPC and the GOL i s spelled out in the C A and in- volves important functions with respect to ascertaining the acceptability and achievement of out- comes of resettlement, livelihood restoration and environmental mitigation programs. Their role i s important for public accountability of NTPC and for the proper working of grievance proce- dures, especially in the case of eventual disputes between GOL and NTPC. The IAG will con- tinue in its role as advisor to the Bank's President and senior management, and is expected to expand its scope of work to cover N T 2 revenue management issues, in addition to the environ- mental and social dimensions of the project. They will continue to conduct annual field visits to the site and will issue reports based on their oversight missions. Though independent of one an- other, the IAG andPOE will likely continue to work inclose collaboration throughout the project implementationperiod. D.7 Policy Exceptions and Readiness 177. N o policy exceptions have been taken in preparation of the project. 178. The project i s well advanced for implementation and the commercial transaction will be ready for implementation prior to effectiveness of Bank Group instruments: The bidding process has been completed for the HCC and will be finalized by Financial Close. Arrangements for NTSEP-funded activities have been confirmed. The financing for the project i s available; financing parties have completed due diligence andarepreparing for internal approvals to meet the requirements of the project. Institutional arrangements for project implementation have been agreed and many of the key staff needed i s already in place. Agreement on GOL project coordination responsibili- ties has been agreed (see Annex 5B). Fiduciary (financial management and procurement) arrangements have been agreed (see Annexes 9 and 10). Safeguards requirements have been met (see Annexes 12, 13 and 14). Disclosure requirements have been met (see Annexes 12 and 13). 62 0 Fundinghas been agreed to mitigatekompensate for anticipated environmental and social impacts, including contingency for cost overruns and under-performance. For unanticipated impacts, an additional contingency of US$10million has been provided. 63 LAO PEOPLE'SDEMOCRATIC REPUBLIC NamT h e m 2 HydroelectricProject and NamTheun 2 Social andEnvironmentProject ANNEXES March 31,2005 Annex 1:GovernmentLetterof ImplementationPolicy(GLIP) LAO PEOPLE'SDEMOCRATIC REPUBLIC NamTheun 2 HydroelectricProjectand NamTheun2 Social andEnvironmentProJect Lao People's Democratic Republic Peace Independence DemocracyUnity Prosperity M o o = = Committeefor Planningand Investment No: 198/CPI Date: 7 March2005 B To: Mr.James D.Wolfensohn . . President The World Bank 1818 HSea Washington, DC 20433 United States of America Subject: NamTheun2 HydroelectricProject: ImplementationPolicyFramework DearMr.Wolfensohn 1. The Nam Theun 2 Hydropower Project is an important milestone in the development history of Lao PDR The project has been strongly endorsed by our National Assembly. It symbolizes the hopes and aspirationso fthe people of our country. 2. The contribution o f the project to p o v w reduction and improvement of the country's human development indicators is sizeable and the project will also make a significant contributionto ow country's other development goals. The preparation ofthe projecthasbeenan enormous learningexercise in terms of building capacity to plan and manage complex multi- sector programs, foster stakeholderparticipationand strengthen Qnor coodimhon. The project will serve as a model for natural resources conservation, trans-boundary cooperation in the Mekongregion, and internationalprivate-public partnerships. Inaddition, the project bas helped focus attentiononbuildingCapacityfor improvingpublic iinancialsystems,targetingrevenuesto povertyreductionpro%rams,andstrengthening e n v - i " M andsocial safegaafilmanagement, The lessons learnedwill help the Prepasation of forure projects and will be applied whenever opportunitiesariseto improveexisting projects. $ 3. The mainpurposeofmy writingto you is to reiteratethe govamnent's dLL - qtionto builduponthe gains already achievedttnoughour cooperationandto Sustaiathembyadopting anImplememrion PolicyFrameworkfortheproject 4. Inthis regard, Iinviteyour @on to the d e r DecisionFramtwork,which we d y adoptedto guidethe preparationofthe project Youmay nxdlthatthislbmwrkis founded on ttmx pillars: (i) implementing a development policy h e w o r k copCreteperfonname that aims at poverty redudonanduxvironmentalpmtectioq (iii "ing * bY A 3 that the technical, financial and economic aspects of the project and the design and implementation of safeguard policies are of a standardacceptableto the donor community; and (iii)obtainingbroadsupportfrom intedonal donorsandcivil society for the country's development strategy andthe NamThem 2 Projectitself. 5. In order to achieve the full benefits of the project, the government proposes an Implementation Policy Framework that will build further on these pillars and asserts its commitment to: e continue to build a viable development policy framework and programs for poverty reduction and for social development and environmental protection, using the National Growth and Poverty Eradication Strategy and the Social and Economic DevelopmentPlansas drivers; e focus on effective implementationof the technical, financial and economic-aspectsof the project, as well as ofthe environmentalandsocial safeguards activities; and 0 further strengthen support fiom the international donor community and global and local civil society for poverty reductionprograms and associateddevelopment plans, and facilitate their involvement during the implementation of NamThem 2 Project itself. 6. As the centerpiece of OUT development frzunework, Iwish to reiterate the govement's strong commitment to our National Growth and Poverty Eradication Strategy (NGPES). We have set ourselves the goal o f reducing poverty by half by 2015 and achieving the other MillenniumDevelopment Goals inour country. 7. We recognize the critical role of macroeconomic stability inthis effort and value the advisory role of the multilateralinstitutions. The continued support of the donor community for the NGPES and the Social and Economic Development Plans i s imperative for the achievement of our growth and poverty reduction objectives. We look forward to a series o f projects in support o f our efforts and will also work closely with all donors to restructure the current portfolioas neededto alignitbetterwiththeNGPES. 8. Inthis context, Iwish to express my appreciation for World Bank support to the ftrst Poverty Reduction Support Credit that is being prepared in parallel with the Nam Them 2 Project and ADB's comprehensive program of strengthehg the State Audit Organizationfor enhancingthe independentaudit capacity ofthe Lao PDR's supreme audit institution. We would like to draw attention to the Letter of Development Policy sent by my colleague, the Finance Minister, to the World Bank wherein the government's plans relating to the strengtheningo f the developmentfixmework are set out. Ido not wish to cover the same ground again in this letter butwill dealwithfive criticalproject-relatedissues 9. The important issues Iwould like to focus in this letter are (i)revenue management, (ii) ensuring adequate environmental and social performance and outcomes, (E)consultation and participation, (iv) monitoring and evaluation, and (v) activities complementary to the NamThem2Project. A 4 .. .. -- . .._ RevenueManagement 10. Improvements in public financial management, especially the effectiveness of public e x p e n d i m , will be essential ifLao PDR is to achieve its ambitious development and poverty redudon objectives. Lnthis context, the government has recently approved a Public Expenditure Management Strengthening Program (PEMSP), which aims to improve policy consistency, efficiency, transparency and accountability inpublic expenditure management by strengthening institutional systems and making progress towards appropriate intemational financial management standards. The PEMSP encompasses improvements in expenditure planning and budgeting, budget execution, accounting andreportingat boththe central andprovincial levels in the periodto end of FY2009. Implementationof the PEMSP will require technical support from long-term and short-term advisors, as well as extensive training for financial management pemxxxL The government is seeking the support of external partners for technical assistance andtraining under PEMSP, CompIementingon-going projects financed by the World Bank and the Asian Development Bank. The PEMSP will provide a h e w o r k for coordinating such external assistance. In order to make an early start on PEMSP implementation, we will draw monies from the ongoing Financial ManagementCapacity BuildingCredit o fthe World Bankto fund program technical assistance requirements until the Ministry of Finance secures grant financing. 11. The revenue management arrangements described inan attachment to this letter describe the arrangements the government will adopt to utilize revenues derived fiom the NamThem 2 project. These arrangements will complement and support implementation of the Public Expenditure Management Strengthening Program. The government is committed to ensuring that all Nam Theun 2 revenues, net of the costs of the NT2 shareholding and overseeing the implementation of the NT2project, are used to finance incremental spending on eligible poverty reduction and environmental protection programs, reflecting the priorities identified in the NGPES and its successors. NamThem 2 revenues will be channeled througha dedicated `WT2 Revenue Account" and released to the Central Treasury Account for the purposes o f budget execution. NamThem 2 revenueswill be usedto finance: the repayment of debt incurredby the Government for the purpose of acquiringequity inNTPC; expenditures relatedto the exerciseof itsrightsandthe performance of its obligations underthe Concession Agreement andthe Project Documents; and eligible poverty reduction and environmental management programs that meet requiredfmancial management, financial reporting andperformance monitoring standards. 12. Publicationof estimatesandallocationsofNamThem2revenuesto eligible programs in the annual budget, as well as quarterly budget execution reports, annual fioancial statements, summaries of inspection reports and audit reports, will ensure high standards of transparency in resource allocation. A program of public expenditure reviews and public expenditure tracking surveys, undertaken in collaboration with the World Bank, the Asian Development Bank and other development partners, will monitor progress inthe development of financial management systems andthe impact of eligible programs' spending at the field level. An annual report will be prepared on the implementation o f the Nam Theun 2 revenue management arrangements and Serve asthe basis for consultations with externalpartners. 13. Inorder to managethe Government's shareholdings intheNTPC projectefficiently and traasparently, we have established a special purpose company, the Lao HoldingState Em&rise 65 A 5 . . ..._.-... . ._-.. .-... __. - . . _ . (LHSE). W e LHSE may play an important role in the future o f development of other indepenknt power producers in Lao PDR its primary fundon inthe mediu" be t0 support implementation of the NTZ project. Inthis context, LHSE's operatingbudget, financed from NT2 related income, will cover only costs directly related to its obligations as an NTPC shareholder, NT2 project oversight and implementationcosts. The Government o f Lao PDRwill also m u f e that LHSE's shareholding inNTPC is fully protected from any risksassociatedwith LHSE's broader development activities. EnsuringEnvironmentaland social P e ~ o m n c and oulcomes e 14. We have worked closely with the World Bank.the Asian Development Bank and other partners to ensure that the decision makingprocess, detailed project design, and implementation program have adopted measures to adequately manage potential environmental and social impacts and risks. The Nam Them 2 Project has beenprepared to adhere to the environmental and social policies of Lao PDR, the World Bank, the Asian Development Bank and other partners. 15. We fully subscribe to the vision developed for addressing environmental and social ! aspects of the project through the Environmental Assessment and Management Plan (EAMP), Social DevelopmentPlan(SDP) andthe Social andEnvi"nental Management Framework and First Operational Plan (SEMFOP). We will spare no effort, in cooperating with'our project partners, the Nam Theun 2 Project Company (NTPC), to anticipate, monitor and effectively mitigate environmental and social impacts and risks, on the plateau and in the watashed and downstreamareas ofthe project. We commit to ensuringthe integrity o fthe project's watershed (Nakai NamTheunNational ProtectedArea and its two corridors) andwill strictly promote and abide by the guiding principles for its medium-to-long-term development set forth in the SEMFOP. Specifically, we will ensure that there is no commercial development (including roads, logging, miningandotherresourceextractiveactivities) intheNakaiNamThemNational Protected Area and the two corridors which together comprise the NT2 watershed, and that all landuse withinthe watershed is fully consistent with the community-based forest and landuse planningandmanagement(FLUPAM)process described inthe SEMFOP. 16. We will also monitor and regulate in-migrationinto the watershed and reservoir areas, resolve the legacy of resettlement of affected ethnic groups in the watershed, and e m e adequate management of cumulative impacts downstream of the Theun Hinboundam. We have addressedthe above-referenced resettlement issues ina letter directed to the World Bankby my colleague, the Minister of A ~ c u l t u r eand Forests in November 2004. As for the impacts downstream of the Them Hinboun, we intend taking a long-term, strategic and integrated approach to the management o fthe NamTheun/Nam Kadingriver basin, to address andmitigate cumulative impacts caused by different development projects, including the suite of planned hydropower and other development projects. This will serve as a pilot for river basin management that will be extended over time to other basins withinLao PDR.. We will be seeking donor support to implement such an initiative, including the establishment of an appropriate institutionalstructure. 17. The government will ensure that capable and qualified staff are assigned to work on a permanent basis in the Watershed Management and Protection Authority, the Resettlement 4 A 6 .. .. - .-.-.. .., ManagementUnit and the Environmental ManagementUnit, to achievethe outcomes specified inthe E M , SDP, SEMFOP and Project ImplementationPlan, in partnershipwithNTPC. As indicatedin these documents, we havedesigned, incollaborationwiththe World B& the Asian Development Bankand other partners, detailedmechanismsfor grievanceresolution, as statedin the SDP, and arrangementsfor continuedconsultationswith project-affectedpersonsthroughout implementation. We will mobilize the resources and accord the priority needed to successfully implementthese arrangements. ConsultationandParticipation 18. We will buildonthe lessonslearnedfiom the localconsultationsinthe preparatoryphase of the Nam Them 2 Project. Inthis context, may Ireiterate that the government will conduct direct consultations with communities and individuals in the project area during the implementation and operation phase to seek their views on a diversity of issues, covering impacts, mitigationmeasuresandoutcomesofthe project. These consultationsandthe associated disclosure of information will be used to make adjustments to project design and to refine mitigation andmonitoring programs. I 19. Letmealso stress the government's continuedstrong commitment to seekingsupportfor the project from the international donor community and from civil society. We value their involvement in our poverty reduction programs and development plans and will continue to facilitate their access to information and participationindiscussionson the project inthe future. We will supportthe useof the Government-ledandUNDP-supportedRoundtableMechanismfor monitoring the NGPES and progress on the Nam Them 2 Project. We will convene periodic meetings of co-financiers for review o f (i) physical progress in implementation of project the investments, (ii) results o f monitoring and evaluation of social and environmental impacts and outcomes, (iii) measures taken to address unforeseen events, and (iv) other dimensions of the project. The government has definite plans to further improve its capacity in the area of public communications and media relations in respect of the project and will continuously update its website. Monitoring andEval&n 20. To support effective implementation of the NamThem 2 Project, we wiU implement the project monitoring and evaluation (MSZE) framework, described in an attachmentto this letter, comprisedoffive complementarycomponents: supervision and systematic monitoring of physical implementation of the hydropower project, includmg the environmentalandsocial safeguardprograms; monitoring of conditionsand outcomesonthe Nakaiplateau (reservoir andresettlement areas) and in the downstream and w&nhed areas as defined in the EAMP, SDP and SEMFOP; monitoring of revenuemanagementarrangements; maintaininga Panel of Environment and Social Experts to advise the government on implementationof the project; and maintainingaDamSafetyReviewPanel. A 7 ... , . . -_--.. __ I .- ., , . ..... . . .. . ... ._. . 21. We welcome the fact that these efforts will be complemented by several other M&E measures financed by the NTPC andthe financing partners: systematic monitoring of the technical and safeguards componentso f the projectand its impacts by one or more professional firms on behalf of the private and public sector financial institutions; 0 regularsupervisionby staff ofthe World Bank, the Asian DevelopmentBankand other developmentpartners; and visits fiom the International Advisory Group that advises the senior management of the World Bank. 22. Let me also assure you that the government will continue to ensure that staff of the Gnancial instiMions involved in the project and their advisors and consultants will have full access to the project area and to information about the project and its numerous activities throughout the implementationperiod. Activities ComplementarytotheNam Theun2Project I 23. The Government's commitment to conservation goals, to better managing the environmental and social aspects of development programs, and to improving rural livelihoods goes well beyond the scope of the Nam Theun 2 Project. We recognize the hportance of strengthening our policies and institutional capacity in these areas and will be taking several measuresin this regardduringthe project implementationperiod. We are working withthe Asian Development Bank on the establishmento f a Lao Environment and ConservationFundby June 2005. We will use this Fund to apply part of Nam Them 2 revenues to support priority environmental protection and conservation programs. Inthe intervening period, we will ensure that the fund follows financial management and reporting practicesthat are consistentwith the Government's public expenditure management system. We are also seeking support fiom the World Bank, for two other projects. The first is a nation-wide Environmental and Social (LEIS) Project, addressingthe needto mainstreamenvironmental andsocial safeguards in i n f h s t m c t ~ ~ ~ development, strengthen biodiversity conservation in Central Lao, and increase the public's knowledge of and support far environmentalmanagement. The second is the Rural Livelihoods Project, for the vicinity of the Nam Theun 2 Project, that would address resource management and rural development challenges at the community level. Bothwill place strong emphasis on broaderandlonger-term capacitybuilding. 24. We will also work on plans for the further development of the Lao power sector, including measuresto promote energy conservation. We will continueour cooperation with other ripariancountriesdirectly andthroughthe Mekong River Commissionto optimize decisions on water resources managementandhydropower development, taking into account trans-boundary benefitsandcosts, including environmentaland social aspects. Inaddition, we will work withthe World Bank, the Asian Development Bank and other partners to improve the governance and management o f hydropower planning and development within Lao PDR Through the LEnS Project andother instrumentS we willseek support to improve our capacityto conduct and apply the findings of environmental assessments, resettlement action plans, ethnic minority developmentplans andother related instruments in the hydropower sector. A 8 .. . 25. Inclosing, letmereiterate thatthe governmentisfully C0"itted to the implementation of the NamThem 2 project so as to meet Lao PDR's development aspirationsand international standards on project procurement,technical aspects and safeguards. We will not hesitate to mobilize technical expertise to achieve this end, both by strengthening our own professional cadres, and by tapping the capacity of consultants and non-govemment organizations with &e requiredexperience and demonstrated record of commitment, where ndedto addreas our own capacityconstraints. We will extend our fbll Cooperationto the donor communitybywotking in partnership,aswe haveinthe past. 26. Please be assured of the govement's deep appreciation of the role of the World Bank andthe Asian DevelopmentBankand other donors inmobilizing financial resources andsupport for theNamThem2 Project. Becauseoftheir interest inthe project, we are copyingthis letter to the other co-financiers. Also, an identicalletter has beenaddressedto the President ofthe ADB. Withbestregards. yours Sincerely, a Dr.Thongloune Sisoulith DeputyPrimeMinister GovernmentofLaoPDR Attachments: 1.NamThem2 RevenueManagementArrangements 2. NamThem 2 EnvironmentalandSocial Issues 3. NamThem 2 MonitoringandEvaluation Arrangements A 9 . . . . . _ . Attachment 1 TechnicalAnnex to GLIP NT2 RevenueManagementArrangements m e hiT2 revenue management arrangements seek to ensure that NT2 revenues are applied transparently and efficiently in financing of poverty reduction and environmental conservation progwns reflecting the Government of Lao PDR's policy priorities as laid out inthe National Growth and Poverty Reduction Strategy and its successors. These revenue management arrangements complement the broader Public Expenditure Management Strengthening Program. The NT2 revenue managementarrangements will be applied for the duration o f the Concession Agreement or as mutually agreed betweenthe Government and the NT2 GoL equity financiers. The NT2 revenue management arrangements described below comprise four pillars: the first pillar addresses the allocation ofNT2 revenues; the secondpillar addresses the flow offunds; the third addresses mechanisms for reporting on the application of NT2 revenues; and the fourth addressesmechanismsfor monitoringandconsultationwith"I2GoLequity financiers. FirstPillar:Ahcation of NT2Revenues 1.1Allocation of Allocations of"2revenues' willbe determined throughthe NT2revenues Government's expenditure p l m r h gandbudget process, as part o fthe allocationo foverallpublic resources. The repayment o fdebt incurred bythe Government for the purpose ofacquiringequityinNTPC,and any associatedcharges, andexpenditures relatedto the exerciseofits rightsandthe performanceofits obligationsunderthe Concession Agreement andthe Project Documents, shallbe financedftomNT2 revenues. All remainingNT2revenues will be allocated to eligible programs. 1.2. Identification The Government will prepare a list of eligible programs that may andrevisionof benefit fromNT2revenues. The selection of eligible programswill be eligible programs. consistent withthe criteria identified in1.3 below. Indicative eligible programs have beenidentifledto reflect the Government's cment priorities, as laid out inthe NGPES, in order to focus attentiono f capacity buildingefforts inthe periodbeforeNT2 project commisSioning. This listwill be adjustedas the Governmentprepares successors to theNGPES: some eligible programs maybe dropped others that meet the selection criteriamay be included. The number andscope ofeligible programs is expectedto gradually expand as linancial andprogrammanagement capacityis strengthened. NGPES 4 successors will identify the NT2eligible programsandinclude '"2revemresare &fined in theDevelopment GrantAgreement, to include: resowce usagechargesandt a m payable by NTPC; pmt of thepnyments underArticle 19.1 ojthe ConcessionAgreement; taxes and dividend payable by theLaoHoldingState Entetpriserelating to its equity holdingin NTPC. A 10 indicative allocationsto these programs. A revised list of indicative programs, indicatingtheir objectives and key performanceindicators, will beprepmedbythe start ofFY2008or the start offiscal year before the year inwhich projectis to be commissioned, whichever is earlier. 1.3. Criteriafor the The selection ofeligible programsto befinancedwithNT2 revenues selectionof will bebasedonthe following criteria: eligible P r o w a) Programsidentiftedas priorities inthe Government's National GrowthandPovertyEradicationStrategy, anditssuccessors; b) A significant andverifiable poverty reductionimpact, providing public goods, services andbfiashucture usedby the poor innnal areas, including public services which aimto promoteeconomic growthby increasing productivityandincomes ofthe poor, andI or c) A significantandverifiable conservation or environmentalimpact; and, additionally, clearly definedobjectives, performance indicators andsystems in place for monitoringperformanceinterms of the volume and qualityofservicesprovided; established mechanisms for program performance evaluation, involving key stakeholders at or close to the field level; programswill be clearly distinguishedinthe Govemment's budget andchart of accounts (througha detailed administrativeI organizational or program classification) at all levels of adrmtllstration, with instiMionalresponsibility for program . . managementclearly assigned; Administrative andfmancial management arrangementsin place that would allow themto meet financial reporting requirements (see 3.1 to 3.3), andhavedemomtmtedcompliance withthese financial reportingrequirements; Programs will have benefitedfrom budgeted expenditures prior to selection andhavea continuingrecurrent financing requirement over the medium to 10%-term, andwithamedium-tam fkmcing plan. Insome cases, the Govementmayintroducenewmedium to long-term programs, reflectingpolicy initiatives launched underNGPESsuccessors. A 11 .. 1.4. Identification Indicative eligible programs have beenidentified on the basis of the o findicative Government's current policy priorities. These indicative eligible eligible programs programswillbenefit fromcapacity buildinginitiativesto strengthen on basis ofcurrent program andfinancial management capacity inthe responsible NGPES. agencies. The list o f indicative eligible programs will be subject to change as successors to the NGPESare prepared. The indicative eligible programs are: a) basic education; b) basichealthcare; c) ruralroads, including the RoadMaintenance Fund; d) lddevelopment initiativesidentifiedthroughaparticipatory planningprocess, includingthe Poverty ReductionFund; e) environmentalprotection initiatives (the Government i s inthe process of establishing an EnvironmentFund). 1.5 Additiodity NT2revenueswillprovideadditionalresourcesto support eligible of e x p e " programs andwill not substitute for financing Gromother sources. financed withNT2 Additionality of budgeted andactual expenditures for eligible revenues. programs will be verified against base expenditures. Base expenditures are the expenditures oneligible programs fhnced fiom general revenues (ie. excluding extemally financedprojects and"2 revenues). Base expenditures will be determined as, whichever i s greater: a) budgeted expenditures in the previous year expressed in realterms for the comparator year; b)the average expenditures inthe three previousyears, againexpressed inrealterms for the comparator year and c) eligible programs' percent share o fbudgetedandactual total expenditures, excluding expenditures relatedto debt servicing, in the previousyear. The basis for determining additionaliv ofNT2 financedexpenditures wilIbereviewedthree years afterproject commissioning, thereafter as deemednecessary, and agreed withNT2 GoL equity financiers, inorder to ensure policy consistency and efficiency inthe application of"I2Revenues. 1.6Allocation o f Proceeds to Government of Lao PDRunder section 19.1ofthe proceeds under ConcessionAgreement that are NT2revenues, will be allocatedto a) Section19.1 ofthe h c i n g of eligible programsinthe fiscal year inwhich such Concession proceeds are made available or jn subsequent years; andb) capital Agreement projects consistent with the objectives ofthe eligible programs. 1.7Documentation Allocationso fNT2 revenuesto eligibleprogramswill beidentSedin ofNT2allocations anannexto MTEFdocumentsandstate budget. This annex will o ffilnds present detailedestimates of NT2 revenues, the corresponding allocations to each ofthe eligible programs, the expenditures financed fromgeneral revenuesto eachofthese programsanddemonstrationof additional& inthese allocations. A MTEFandbudgetdocuments identifying allocations to eligible programs willbepreparedand A 12 _. -_... - . . .I publishedinFY2008. Thereafter, budgetdocumentsidentifying allocationsto eligible programswill be preparedandpublished annually, andthe MTEFwill bepublishedasupdated. SecondPillar: How of Funds 2.1. T " y N T 2 "2revenueswillbedepositedinadedicatedTreasuryaccountheld revenueswill be at the Banko fthe LaoPDR("NT2RevenueAccount"). This account depositedina will bemanagedby Treasuryas one ofthe Government'streasury dedicated"-2 accounts. The Tax andState PropertyDepartmentswilladmbkter Revenue revenue paymentsaccordingto applicablelegislation. "I2revenues Account", heldand payable by NTPC will bepaiddirectlybyNTPC to the NT2 Revenue managedby Account. NT2revenues payableby the Lao HoldingState Enterprise Treasury (LHSE), will bepaidthroughanonshoreescrowaccountopenedby the LHSEdirectly to the NT2 RevenueAccount. 2.2 Transfer of Treasurywilltransfer funds fromthe "NT2 RevenueAccount" to the NT2 revenues Central Treasury Account on amonthly basis, for the purposeof h mthe `?VI2 budgetexecution. Transfersoffimdsfromthe `?TI2Revenue RevenueAccount" Account" willbeauthorizedbythe BudgetDepartmentonthe basisof to the Central apportionmentsfor eachofthe eligibleprograms, reflectingbudget Treasury account. allocationsandbudgetexecution, apportionmentsfor the repaymentof debt incurredbythe Governmentfor the purposeofacquiring equity inNTPC,andexpendituresrelatedtotheGovernment's exerciseofits rightsandtheperformanceofits obligations underthe Concession Agreement andthe Project Documents.Fundstransferredto the CentralTreasuryAccount will be disbursedfollowingprocedures foreseenunder applicablelegislation. 2.3 Annual The Ministryof Finance will preparean annualstatementofbalances, fmancial statement receiptsandtransfers for the `WE! RevenueAccount", startingfrom o f"NT2 Revenue the fiscal year inwhich the Governmento fLao PDRfirst receives Account" revenuesfromtheNT2 project. 2.4 Withholdingo f Inexceptionalcircumstances,the Minister o fFinancewill withhold funds inthe NT2 NT2revenuesinthe `WT2 RevenueAccount", correspondingto all or revenueinthe part o fthe allocationsandrelatedapportionmentsof eligible programs "32Revenue where the MinistryofFinanceconsidersthat one or moreofthe Account" following applies: a) the application offunds i s nolongerjustifiedor appropriate; b) the agencies responsiblefor eligible programshavenot complied with ftnancial reporting, inspectionandauditrequirementsona timely basis; c) there hasbeenaserious financial control failure by anagency, as demonstratedby audit, inspectionreportsor informationreceived fiommonitoringprogramimplementation; d) budgetexecutionhasslowedsignificantly andthe Ministry 4 A 13 considersthat itwill no longerbeableto apply funds efficiently; e) the agenciesresponsiblefor eligible programsdo notapply their allocationofNT2 funds for purposesconsistentwiththe criteria establishedunderthe fund and/or the objectivesofthe eligible progtams. 2.5 Reallocation of The Ministryof Financemay reallocate"`2revenuesbetween NT2 revenues eligible programs duringthe fiscalyear inorder to ensure efficient duringbudget budgetexecution. The Ministry of Financemay reallocateallocations execution andapportionmentswithheld as describedin2.4 above. Realldons o ffunds willbeauthorizedfollowingprocedureslaidout inapplicable legislation andwill bereflectedinpublishedquarterlybudget executionreports. 2.6 Application of Any end-of-fiscal year balanceso fthe ""NRevenueAccount" will `"I2Revenue beretainedinthe accountandapplied inapportionmentsfor eligible Account" balances programsinthe following fiscal year as describedin2.4 and2.5 above, ensuringthat the application ofrevenuesis consistentWith additionalityrequirements in1.5 above, This may includeh d s retainedto meet commitmentscarriedforward for eligible programs. Itis not intendedthatthere shouldbeanaccumulatingbalanceonthis account. However, balancesresultingfromthe paymentsofNT2 revenuesunder Section 19.1ofthe ConcessionAgreement (see 1.6 above) beretainedinthe account for the purposesof Ievelizing expendituresoneligible programs. ThirdPillar: Reporting 3.1 Budget and The publishedstatutory chart of accountsandbudgetnomenclature accounting will clearlyidentifyall eligible programs(following adetailed registers for administrative/ organizationalor programclassification) so that the eligible programs application ofNT2 revenuescanbetracked(see criteria in2.2). A revisedchart of accountswill be implementedfor eligible programsin the preparationofthe F'Y2008budget. 3.2 Reporting on The Ministryof Financewill prepareandpublish, from FY2008: budgetexecution quarterly budgetexecutionreports, providing summary information for eligible onexpendituresfor eacheligible programs, within sixty daysofend Programs of period; andend-of-year financial statementscovering eachofthe priority programswithinthe time fiame specified inlegislation. The financial reports andfinancial statements for priority programsshould be preparedon both a cashand amodified-cash(including reporting commitments) inaccordancewith intemationalpublic sector accountingstandards. 3.3 Reportingon The Ministry of Finance's InspectionDepartmentandotherrelevant internal control in Departmentswill undertakeanannualprogramof internalauditsof 4 A 14 eligible programs eligible programs andfiom FY2008publish a summary report outliningthe financial management, controlweaknessesand irregularitiesidentified, casesofnoncompliance inthe properusefor funds for eligible purposes, recommendationsmadeto addressthese mncems andthe management actions taken by the responsible agencies. 3.4 Audit o f'"'I2 The State Audit organizationwill conduct andpublish, eachyear Revenue Account" startingwithfinancial statementsfor FY2008: anauditopiniononthe andeligible statementof receipts andtransfers ofthe '?TI2 Revenue Account"; programs andanaudit opinion onthe h c i d statementsofeligible programs andcompliance withthe Government's financialmanagementand procurement procedures, andthat funds have beenappliedfor the purpose o fthe eligible program. Inadditionto audit opinions, the auditors will providea summary of audit findings andthe managementresponsehighlightingthe principal weaknessesand irregularities identifiedby the auditor andcorrective actionto betaken to strengthenmanagement systems. 3.5 Audit Auditswillbeconducted inaccordancewithinternationalpublic standards sector accounting standards issuedby IFACfor financial audits and INTOSAIstandards for performance audits. As partof its capacity buildingefforts the StateAudit Organizationwill commissionapeer reviewby anINTOSAI member to advise onprogress towards meetingapplicable standards. Stepswill betakento implementpeer reviewer's recommendations. Peerreviews will be conducted: in FY2006; inthe fiscal year inwhich the GovernmentofLaoPDRfirst receives revenuesfrom theNT2 project; and every three years thereafter. 3.6 Annual report The Ministry of Finance will publishan annual report within six onimplementation monthsofthe end o feachfiscal year inwhich itwill confirm that of NT2 revenue NT2 revenueshavebeenallocatedto priorityprograms, consistent management withthe fundcriteria, andthattheseprograms havecompliedwith reportingandGovernmentfinancialmanagement requirements. The reportwill also detail correctivemeasureshavebeentakento ensure that eligibleprogramsmeetallocationandreportingrequirements. The reportwill also include summary informationonthe performance of eligibleprograms inrelationto their objectives andperformance indicators. Fourth Pillar: Monitoringand Consuliation 4.1 The PER andPETS will be an on-goingprocess, implementedthrough Implementationo f a collaborative approachbetweenthe MinistryofFinance andNT2 PublicExpenditure GoLequity financiers. Inconsulktionwiththe Government, other Review andPublic development partnersmaybe requestedto support the PERandPETS. Expenditure Publicexpenditure reviews andexpenditure trackingsurveys willbe A 15 TrackingSurveys undertakenevery two years startingin2006, inorder to assess i) progress inimplementationof the NT2 revenueandexpendrture management arrangements;ii)progressinstrengthening public expenditure managementsystems, assessedPEMSPperformance indicators; iii) efficiency andeffectiveness of spending; and, after the commissioning, iv) the impact ofNTZ financedeligible program expenditures andthe effectiveness ofexpendituremanagement and controlarrangements. The Government will ensure m s sto the data, personnel and documentation neededto assess progressin implementingthe revenue andexpmhture management arrangements, the h c i a lcontrolenvironment andthe performance of programs financed withNT2 revenues.The PERandPETSreports willbepublished, followingstandarddisclosureprocedures. 4.2 Reviewof Prior to projectcommissioning, the Government andNT2 GoL equity status prior to financiers will consult annually onprogress inimplementingthe NT2 project revenue management arrangements. At least six months priorto the commissioning Commercial Operations Date, the Government, incollaborationwith the NT2GoL equity financias, will assessprogress insettingup revenue management arrangements andprepare a report coveringthe issues addressedinthe annual report described in3.6 above. This review will be informed by analysisofthe results of audit peer review process andrecomendations (3.5) andPERsandPETs(4.1). 4.3 Annual After project commissioning, annualconsultations between consultations with Government of Lao PDRandNT2GoL equity financiers willreview NT2GoLequity progress inimplementation ofNT2revenue management financiers arrangementsandthe impactofNT2 financed expenditures. These consultations will be informedbythe annualreport (see 3.6), financial andinspectionreports(see 3.2 and3.3) andauditreports(3.4), as well asummary reportonthe auditpeerreviewprocess and recommendations (3.5) andPERsandPETs (4.1). Inthe context of these consultations, NT2 GoL equityfinanciers may advise on strengthening implementation arrangements. 4 A 16 Attachment 2 TechnicalAnna to GLIP "I2HydroelectricProject EnvironmentalandSocialIssues - The Government's Role in ImpIemenratron of EnvironmentalandSocialProgramsandActivities of theProject 1. The Nam Them 2 Project has been designed to ensure full consistency with the envitonmentaland social policies of Lao PDR, the World Bank,the Asian DevelopmentBank and other financing parties. The three safeguards documents -- theEnvironmental Assessment and Management Plan (EAMP), the Social Development Plan (SDP) and the Social and Environmental Management Framework and First Operational Plan (SEMFOP) -- lay out principles, technical guidelines, procedures and programswhich the GoL is fully committed to supporting in the course of project implementation. The Concession Agreement signed with . NamThem 2 Power Company (NTPC) specifiesthe obligations ofthe GovernmentandNTPC to implement the provisions contained in the three documents. The NTPC's Project Implementation Planand h u a l Implementation Plans (All') will further detailthe modalities, timelines andbudgets. 2. The GOL recognizesits dualrole inthe project: (i) As aparty to the ConcessionAgreement, the Govenunentwill performthe functions stipulated therein, including those involving functions such as landtitling, licensing andenforcementofallregulationsapplicableto any aspect oftheproject; and (ii) As a shareholder of NTPC. The Governmentamed Lao State Holding Enterprise (LSHE) holds 25 percent equity in NTPC. NTPC is responsible to ensure the achievement of the project's objectives and that its programs and activities are implemented in accordancewith the principles, technical stan- and procedures embodied in the Concession Agreement, and the safeguards documents, and elaboratedinNTPC's Project ImplementationPlan(PIP)andthe AIPs. JointResponsibilities 3. As a party to the Concession Agreement, the Government will ensure that adequate facilities and resourcesare available ina timely manner to support project implementation. This includes qualified staff in.suficient Management Unit m,the numbers, assigned or recruitedto work inthe Resettlement Environmental Management Unit m,andthe Watershed Management andProtectionAuthority (WMPA). To this endythe ConcessionAgreement sets out the respectiveobligations of boththe GovernmentandNTPC, as summarizedbelow: (i) LSHE,jointly withthe other shareholdersof NTPC,wdl implement, ,the socialand environmentalprogramsonthe plateauandinthe downstreamareas. (ii) NTPCwill contractually obligatethe HeadConstruction Contractor, civil contractors and s u b c " a c t r s to implement environmental and social mitigation measures underits guidance. 4 A 17 . (iii) NTPC will also assist the Government's RMU and the EMU in Carrying out those activities of the SDP and the EAMP which have been attributed to govemment agencies, on the basis of arrangements that will be reviewed at the time of preparationof eachAIP andas neededinthe course ofthe year. (iv) Inthe case of the programs on the Nakai Plateauand the downstream areas, it is envisaged that the role of govemment agencies will gradually kcrease as project implementation proceedsandthe agencies' capacity is strengthend (v) In the case of the NT2 Watershed, the Government, throw the Watershed Management Authority (%"A), will have sole responsibility for implementing SEMFOP, and will seek assistance fiom NTPC for project management @rocurementandfinancial management)expertise. (vi) WMPA will work inclose coordination with sectorat agencies, and provincial and district authorities. (vii) NTPC will provide the h c h g for SEMFOP implementation and will carry out procurementandfinancial managementactivities onbehalfo fWMPA 4. As indicated inthe documents, the Government, incollaboration with the World Bank, the Asian Development Bank and other financing parties of the Nn Project, has designed arrangements for continued consultation with and participation o f project-affected persons throughout the m u s e of project implementation. The Government has also developed detailed mechanismsfor grievanceresolution inanticipation that a project of the scale andcomplexity of NT2 may give rise to unforeseen impacts and disputes which will need to be c h e l e d and resolved ina timely and fair mauner. The grievance mechanisms currentIy foreseen inthe SDP andthe EAMP (including the H C C - E m ) will be carefully observedinthe course of the fist year of implementation. The Governmentproposesto explicitly review the effectivenessofthese grievance mechanisms with the Social and Environmental Panel of Experts (POE) by June 30, 2006, andadjustthem, asneeded, thereafter. Exclusive Responsibiih 5. With respectto areas where the Governmenthas exclusiveresponsibilities - such as land titling, licensing and enforcementof regulations-- we commit similarlyto ensuring timely and competent performance in support of the project. To this end, a number of ministries, agencies and provincial administrations will play an important role in implementation of the project. These include: (a) the Ministry o f Agriculture and Forestry and agencies under it, including Department of Fisheries, Agriculture, Forestry and Forest Resources Conservation; (b) the Ministry of Industry and Handicrafts, and agencies under it, including the Bureau of Secretariat for the Lao National Committeeon Energy and Electricity of Laos; (c) the Science, Technology and Environment Agency, and the Department of Environment under it; (d) the Ministry of Finance; (e) the Ministry of Labour and Social and Welfare; and (f) the Administrations of Khammouane, Bolikamxay and Savannakhet Provinces. 6, To ensure effective coordination in project implementation, the Government has established a steering cummitt=, integrated by the above-referencedministries, agencies and local authorities, supported by a 111-time secretariat. The Government has assessed the strengths and weaknesses ofthe the key implementing agencies, with special focus onthe W, 4 A 18 ,. . - E N , WMPA LHSE, and accordingly GOL has developed an institutional strengthening programwhere needed. This programwill be implemented over a periodof three years andpaid for by the Project, as provided for inthe Concession Agreement. The programwill include a menu of capacity building options and will be undertaken by staffing up on critical skills, conducting in-house training, andor bringing in external assistance (such as consultants or NGOs). Government agencies are in contact With operational NGOsto assist in these capacity buildingefforts and insome cases work has already begun. The Government intendsto widen the involvement o f these operational NGOs inproject activities, eventually leading up to their possible involvement inother projects.. 7. The Government also highlights the following specific activities, complementary to the NT2 project, where ithassovereign authority: (9 Controllingmigration and land use on theNakai Plateau: The Government, through the Khammouane Provincial Governor, will control and regulate in-migration into the plateau and more specifically the reservoir area, d g that (a) the updated censns undertaken in 2003 is accepted as the basis for identifjhg those who will need to be relocated and are thus eligible for compensation measures defined in the CA; (b) maintainingthe reservoir area, once the area is cleared and before the reservoir filling operations are complete, will be absolutely ensured; and (c) once resettlement villages and the reservoir is formed, these areas and the resources therein will be for the exclusive use of resettles In addition, the Government, through the relevmt district authorities, will revise and update urban development plans to take into account the likely influxo fpopulationarising out o f construction activities. Planswillbeupdatedfor Gnommalat and Oudumsouk Towns by May 1,2006; and thereafter for any others, as identified in the Annual Work Plans or as otherwise agreed to in the course of project implementation. Legacy of past resettlementof ethnic groups mthe Warshed. As confirmedbythe Ministerof Agriculture andForestry inhis letter o fNovember 2004 to the World Bank, the Government will address pending issues o f past resettlement inthe Watershed. It proposes to: (a) by March 30, 2006, iden* and consult with the ethnic groups, who were previously displaced from the Watershed through past resettlement; and (b) by December 30, 2006, develop appropriate plans as needed to resolve pending issues, including the option for households to return to their previous ancestral and cultural territory; and to benefit from the SEMFOP program. The Government also commits to not resettle any other inhabitants from the Watershed area. (iii) Managementof cumulativeimpactsinNamTheun" Kading (AT"River Basin. In keeping with the decision of the Government's Water Resources Coordination Committee, relevant agencies are collectively pursingthe task of establishinga national approach for the integratedmanagement o fthe country's riverbasins, including the main tributaries of the Mekong. Developing and implementing such an approach, inline with international practices, is resource-intensive and will take many years. With assistance h m the Asian Development Bank and the Agence Franpise de D6veloppement, the Government is already preparing such a plan for the NamNgutnRiver. Similarly, the Government proposes to take a long-term, strategic and integrated approach to the management of the "I(Basin, to address and mitigate cumulative impactscausedby 4 A 19 diferentdevelopment projects, including the suite of plannedhydropower and mining projects. Specifically,the Governmentwill seek support fromIDA throughthe proposed LaoEnvironmentand Social Projectfor this initiative. The Government envisagesthat: (i)the scope of work toandesign such an integrated approach would be agreed by December 31,2005; (ii) institutional hework for river basinmanagement of the "KBasinwilibedesignedbyJune30,2007;and(iii)specificagreementwiththe a Thin Hinboum Power Company on d o w " ofthe ThemHint" damthe management of the cumulative impacts would bereachedby December31,2007. 8. In addition to the above, the Government sees in the "I2 Project a model for testing guidelines and approaches that, with suitable adaptation, could be appliedmore broadly inthe country. In the medium term, the benefits h m such an approach would lead to the strengthening of our capacity to managelargebhst"e projects, biodiversityconservation, management of social and environmental safeguards of development programs, improvementofrurallivelihoods,asmentionedinthis letter. A 20 . . .... .___-. - ~ . . . .. , , , I . , . . .. . .. ~ . . -....-.-. I.... Attachment 3 TechnicalAnnex to GLIP NT2 Monitoringand EvaluationArrangements 1. The NT2 project is large and complex, encompassing three distinct geographic areas within the overall project area: the KakaiNamThemNationalProtectedArea andtwo comdors linkingit to other NPAs (the NT2 Watershed), the NakaiPlateau, and the d o w " areas of the NamThem and Xe BangFairivers. The monitoring andevaluation(M&E) arrangementsfor the project seek to ensure that information on physical progress and the impacts and outcomes expectedfrom the project are adequate inscope and detail, murate, timely and relevant to the needs ofthe Government of Lao PDR (GoL),project sponsors, financial institutors and other stakeholdersinvolved inthe project, so as to ensure that effective arrangementsare inplace for regularoversight, monitoringandevaluationofproject implementation. 2. The purposeof this annex is to describethe Government's obligations and commitments with regardto the M&Efiamework that havebeenagreedbetweenthe GoL, the NamThem2 u Power Company (NTPC) and the international financial institutions acting as lenders andor guarantorsto the project. 3. Under the project agreements, the GoL has the sole responsibility for management and protection of the "I2 watershed, as described in the SEMFOP document, and shares responsibility for some of the resettlement activities on the Nakai Plateauand for some of the social and environmental impacts in the downstream areas with NTPC. It also has a national responsibility to ensure that the terms of the ConcessionAgreement between it and NTPC are honored in full and that there are no material impacts on its citizens, the environment or the economy inthe project area that are caused by the project and left unmitigated. Finally, the GoL i s concernedto maintain a highdegree of interest and involvement o f the internatiod financial and development iustitutions and civil society in progress on the NT2 project and, more generally, inthe developmentofLao PDR 4. Accordingly, the GoL acknowledgesthe following responsibilities which fall to it under the M&Eframework and intendsto take the following actions to meettheseresponsibilities: a. Ensure the accurate coIlection and anaIysis of data and information by govemment bodies involved in project implementation. These bodies include the Environment Management Unit (EMU), the Resettlement Management Unit 0andtheWatershedManagementandProtectionAuthority(WMPA)under the respective authority of the Science, Techology and Environment Agency (STEA), the Resettlement Committee (RC) of the Khammouane Provincial. Government and the Ministry of Agriculture and Forestry (MAF). To do so, the GoL will ensure that these implementing bodies are sta.fed with qualified professionalsandthat the scope and frequency of the datato be collected andthe reportingformats for eachofthesebodieswill be agreedwiththe Lenderspriorto project effectiveness. GoL will also grant external M&Ebodies 111access to the project sites andother afectedareas. A 21 b. Ensure the prompt dissemination of that information in the form of periodic progress reports of agreedscope, detail andformat to the independentmonitoring agencies (IUAS) which are charged with monitoring and evaluating the performance of these bodies, expert advisors to the Government, including the Government's Engineer (GOLE), the Dam Safety Review Panel (DSRP), the Panel of Experts (POE), and to the Governmentbodies involved indirect project oversight: the Lao National Committee on Energy (L,NCE) and the National SteeringCommittee onNT2Implementation(SC). c. Ensure the prompt dissemination of all information on project progress, in the form of periodic progress reports of agreed scope, detail and format, to the participating jnancial institutions and their advisor, the Lenders' Technical Advisor (LTA). The LTA will receive information on project progress directly from NTPC and .from all government implementing agencies through the Secretariat of the LNCE as these reports become available. These reports would cover physical progress, environmental andsocial aspectso fthe project,revenue management arrangements and progress under the public expenditure management strengthening program (PEMSP), whether produced by project implementingagenciesor bythe expert advisorybodiesandthe IMAs.The scope, frequency and reporting formats for each of these bodies will be agreed with the Lenders prior to project effectiveness, The information fiom Government agencies to the LTA will be for the use o f the LFIs andbilateral agenciesandwill not be made available to the private lenders. We understand that adequate provisions will be put inplace by the LTA to ensure the confidentiality of this information andwould expectthat a suitableconfidentiality undertakingwouldbe entered into for this purpose with the Government. Reporting on revenue management issues will be directed to the IFIs and interested bilateral agencies only. d. Facilitate the timely work of the expert bodies established to aa'vise the Government (these include the DSRP, GOLE, and POE), as well as the LMAS, being heedbyNTPC under the CA, to monitor and evaluate the performance of government implementingagencies (EMU, RMUand WMPA). To do so, we will e w e that the expert bodies and the I M A s remain in place, legally empowered, with adequate resourcesand full access to the information necessary andto the project area so that they cancarry out their respectiveresponsibilities during the project period. They will receive copies of periodic reports intheir areas ofresponsibility electronically andas soon as they are published e. Facilitate periodic supervision by the individual financial institutiom participating in the project and their advisors, in particular the LTA and the International Advisory Group P G ) , providing them full information JEom Government and non-government sources, and enabling them access to thejdl project area. The Government will continue to provide full support to the supervision activities of the IFIS,the private financial institutions and their advisors. It understands that the lenders will seek to coordinate their supervision activities so as to minimize the number of requests for information or site visits A 22 .__--- ....... . and to utilize information available to project implementing agencies where available. f. Facilitate the work of the internationalfirrcmcial institutions to assist the GoL to lay thefoundations for robust NT2 revenue management mangements through periodic supervision missions by their staff and advisors, and the carrying out of periodic public expenditure reviews and public expenditure tracking surveys, as set forthinthe technicalannex onrevenuemanagement. g. Coordinate the Govemment's involvement in and oversight of the project to ensure efficient coordination of all governmental agencies involved in the NT2 project, prompt action on the part of these agencies to meet the government's commitments under the project agreements, and act as liaison to the financial institutions participating inthe project, as well as local, regional and international stakeholders. To carry out these functions, the Government has established two bodies to oversee implementation of the "I2 project. The Lao National Committee on Energy (LNCE) is responsible for ensuring that NTPC and the Government meet their respective responsibilities under the CA. Through its secretariat, it will coordinate Government oversight of implementation of the NT2 project, receive reports from project implementation entities and expert advisory bodies and disseminate information to lenders an& through its website, to the public. The Chairman of the LNCE i s the Deputy Prime Minister. The Lao Holding State Enterprise has been established as a new state-owned enterprise, wholly owned by the Ministry of Finance, to hold the Government's shares in NTPC. Itwill builda specialist staff withthe necessw technical skills sufficient to act as shareholder, The Government has a third entity, which isthe National Steering Committee on NT2 Implementation. It brings together all concerned government departments involved in the NT2 project to ensure smooth, cross- ministerial cooperation and coordination between agencies of the central government and the provincial andlocal governments involved inthe project. The Secretariat o fthe LNCEwill assume the responsibility to coordinate the inputsof all concerned government agencies and to follow up to ensure that the Committee's decisions are implementedefficiently. h. Join with theparticipatingfinancial institutions in annual consultations to review progress on technical, environmental, social and other project-related mutters, including the public expenditure management strengthening program and NT2 revenue managementarrangements, as well as anin-depthreview of all aspects of the project six months prior to the commercial operations date (COD). The Government intends to entrust this responsibility to the LNCE which will act as the Government's international representative on the project. The Government plansto take the leadin callingfor andchairing an annualconsultative review of project progress, bringingtogether the GoL, NTPC and the participatingfinancial institutions,withthe supportofthe IFIs involved inthe project. i. Inform interested stakholders, including civil society, about project devebpments through the UNDP Round Table Process, or alternative mechanisms, and an updated Lao Government project website and other G4 A 23 .._. measures. The LNCE will representthe Government inthe UNDPRoundTable Process, which brings together development orgauizations beyond the scope of the NT2 project. F d y , itplansto maintaina periodicdialoguewith civil society on the project. The LNCEwill update its current projectwebsite to post periodic regorts on project progress, including the reports of the expert advisory bodies (DSRP, GOLEand POE) andthe IMAs. 5. The GoL expects to be able to continueto draw k l y on the advice and suppcnt of the participating financial institutions, and in particular the support of the IFIS,to build its institutional capacity for the purposes described above, to m e that the progress reports are complete, objective and timely, and to maintain a constructive dialogue with all project stakeholdersandcivil society. . . -... . .. . . . _ i.,. ... . -. .- ....-. Annex 2: Country andSector Background LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 Social andEnvironmentProject A. CountryBackground 1. Lao PDR is a small, sparsely populated, landlocked country with extensive natural resources. With a population estimated at 5.7 million in 2004, and growing at a relatively rapid rate of 2.6 percent annually, Lao PDR i s characterized by a rich cultural and ethnic diversity where almost half of the population belongs to minority groups concentrated in the upland areas. Covering an area of 236,800 square km in the center of the dynamic Mekong region, Lao PDR shares borders with Thailand, Vietnam, China, Cambodia, and Myanmar. Although infrastructure - roads, telecommunications, water and electricity - i s underdeveloped, the country i s rich in water resources, tropical forests and minerals. A large majority of the population relies for its livelihood on agriculture, which accounts for over half of GDP. Urbanization i s relatively low at 25 percent. Gross national income (GNI) per capita stands at around US$340 in 2004. Reliance on external support to the budget remains high, and donor- funded programs account for nearly 40 percent of total public expenditures. A.l PoliticalContext 2. Lao PDR has maintained a single-party system, similar to Chinaand Vietnam. The Lao PDR People's Revolutionary Party (LPRP) i s headed by the Party's Central Committee comprising 53 members elected at the Seventh Party Congress in 2001. The structure of political power has remained unchanged since 1975, with a top - down decision - making process. The National Assembly, whose members are elected directly by the people from a list of Party candidates, as well as any independent candidates, i s increasingly playing a stronger oversight role. In the provinces, governments have a high degree of autonomy over resources, expenditures, and services. Although there are signals that a political transition i s slowly beginning, as reflected inthe gradual process of decentralizationof decision making, as well as a greater openness in internal processes and a substantial improvement in the dialogue with donors, it i s likely that efforts to accelerate the pace of economic reform will still be constrained by the inertia of the political culture. 3. Civil society has a limited but slowly expanding role. International non-governmental organizations (NGOs) have been present inLao PDR for some time. Several international NGOs support knowledge sharing and networking with local civil society groups and a few local independent associations have been formed recently, including education support groups, economic and development support organizations and religious associations. Interest groups (i.e. women, youth, labor, ethnic groups) are formally represented by mass-based organization (MBOs) linked to the Party. Social accountability is weak, but there is potential for MBOs to represent constituents in bottom-up policy formulation and decision-making. Although the local media i s owned fully by the state, there i s open access to foreign media and the Internet. A 25 A.2 Economic Transition and Strong Growth 4. Lao PDR has undertaken significant economic reforms to move from a command economy towards a market economy. When Lao PDR was established in 1975, a policy of "accelerated socialization" was pursued, including extensive agricultural collectivization. However, by 1982, the use of "market forces" was promoted at the Third Congress of the LPRP and, though halting at times, there has been progress towards this goal. In 1986,the Government officially abandoned the central planning system and introduced the New Economic Mechanism. Important steps were taken, such as near total price liberalization and exchange rate unification, the removal o f the Government's trade monopoly, and the opening up of foreign and inter- provincial trade. Private firms were allowed to enter the market and family farms were encouraged over collectives. The private sector began to emerge and the number of state-owned enterprises (SOEs) was reduced by 75 percent. 5. During the 1990s, structural reforms continued more slowly and intermittently with major setbacks resultingfrom the economic crisis at the end of the decade. In 1991,the loss of official development assistance (ODA) following the collapse of the Soviet Union stimulated a re-orientation towards Asian and western markets. The Government continued structural reforms inthe first half of this period, including further efforts inthe banking and SOE sectors, but these and other reforms were only partially implemented. Even so, the Lao PDR economic structure gradually came to be based primarily on the private sector, with SOEs accounting for a relatively small share o f economic activity; and growth in trade continued, together with an increase in private investment.' Towards the end of the 199Os, the country underwent an acute period of macroeconomic instability. Although the Asian crisis was a contributing factor, the domestic problemsstemmed largely from a breakdown infiscal management in 1997-98.The government, affected by a decline in exports and foreign investment, and anxious to protect food security, launched a series of large investments in irrigation aimed at achieving rice self-sufficiency, These investments, though well intentioned, were unplanned and pushed through without judicious financing arrangements. The consequences were severe.2Inlate 1999,the Government responded b y launching a successful stabilization program, tightening monetary and fiscal policies and, by early 2001, the currency had stabilized and inflation was reduced to single digits. 6. Annual average real GDP growth rate was 6.3percent between 1991 and 2000, despite the slow pace of reform and the Asian crisis. This compares favorably with the growth rates of China, Vietnam and other East Asian countries during this period. At its lowest point (1998), growth fell to 4 percent. Manufacturing and services were the main drivers of growth during the early 199Os, with agriculture taking the lead during the later years. Natural resources also contributed significantly to growth during the early 199Os,but this dropped off with a decline in forestry sector contributions. Exports grew at an annual rate of 27 percent during 1990-1995,but export growth fell to only 2 percent a year during 1995-2000. 7. Increasedgovernment commitment accelerated thepace of reforms during 2001-2004. This commitment is reflected by the phased reforms launched in 2002 in public expenditure SOEs accounted for 1 percent of employment, 20 percent of manufacturing output, and 30 percent of bank credit in 2002, and private investment represented 10.l`percent o f GDP in2003. Heavy borrowing from the central bank resulted in a rapid expansion o f liquidity that caused a collapse of the kip, the local currency, and triple digit inflation. A 26 management, banking and rural finance, SOEs, forestry, trade and the private sector, as well as by the continued stabilization program that has tightened monetary and fiscal policies and reduced inflation to single digits. Nevertheless, the Government's fiscal position has continued to remain fragile with relatively weak revenue performance, weak public sector management, a weak banking sector, and poorly managed remaining SOEs. Some progress has been made in improving public expenditure management, including publication of the State Budget, and creation of a central Procurement Monitoring Unit and the State Audit Organization. The Government has also implemented an ambitious decentralization policy, intended to bring decision making closer to the field level, but has, unfortunately, made fiscal management more difficult. Furthermore, there has been little progress in reforming civil service management and pay. Overall, public administration reform has proved to be much more difficult to implement than the first wave of economic reforms. 8. between 2001 and 2004. Annual growth reached 6 percent in 2004. All sectors - agriculture, Real GDP growth averaged a slightly lower but still a robust rate of 5.6percent a year manufacturing, tourism as well as mining and hydropower - grew during this period, with miningtaking off for the first time. Private investment, especially foreign investment, showed a persistent increase over these five years, albeit from a very low level, but growing to nearly 10 percent of GDP in 2004. While there were investments in tourism and garments, most of this increase in 2003 and 2004 came from foreign investment in the mining sector, especially in copper and gold. Export growth stagnated during the 2000-2003 period, butjumped in 2004 to a rate of 18 percent, driven mainly by garments, electricity, mining and ~ o f f e e ,with most of it ~ going to ASEAN countries and China. 9. The macroeconomic situation has been significantly better during the 2001-2004 period than in thepreviousfour years. Headline inflation averaged 11percent a year during the 2001-2004 period compared to an average of nearly 70 percent a year during 1997-2000. There has been a noteworthy improvement in overall macroeconomic performance over the last four years,4 although Lao PDR's track record of maintaining single-digit inflation rates over a long period remains weak. Nevertheless, the short-term macroeconomic situation i s satisfactory, as end-of-period inflation rate reached single digits (i.e., 8.6 percent) inDecember 2004. 10. Thisperformance was helped by significantfiscal adjustment.In2002/03 when revenue from timber royalties and other non-tax revenue fell b y nearly 2 percent of GDP, the overall fiscal deficit (after grants) jumped (Figure 1). The needed fiscal adjustment took place in 2003/04. Vigorous government efforts to mobilize taxes in 2003/04 combined with the full-year impact of petroleum taxes increased tax revenue (excluding timber royalties) from 8.1 percent of GDP in 2002/03 to 8.9 percent of GDP in 2003/04.5 highlighting a significant additional tax effort of 0.8 percent of GDP. This led to a modest increase in total revenue from 11.1to 11.2 In the same period, imports grew 23 percent and consistedof machinery, equipment, and raw material for the garment industry. Large discrepancies exist among estimates of exports and imports provided by different agencies in Lao PDR. Discrepancies in Lao PDR export and import data were described in the World Bank, "Economic Monitor" (May 2004 issue). During this period, monetary policy.was geared towards reducing inflation Credit growth has thus remained subdued in 2004 with broad money growing at around 20 percent. This was made possible by the avoidanceof bank financing of the budget. IMF: Lao PDR: StafSReportfor the 2004 Article IV Consultation, November 2004, page 9. A 27 percent of GDP because there were offsetting declines in collections from timber royalties, non- tax revenue and import tax revenue (due to ASEAN Free Trade Area (AFTA) tariff reductions) in that year. Expenditures were reduced by 1.8 percent of GDP, and the fiscal deficit fell accordingly in 2003/04. This helped to keep domestic financing of the deficit low and contributed to bringing inflation down to single digits inDecember 2004. 11. Structural constraints to sustainably increase revenues have begun to be addressed. Although the revenue effort in Lao PDR i s low relative to many o f its neighbors, the difference narrows markedly once revenue i s expressed as a share of non-agricultural GDP, where Lao PDR stands at 18 percent compared to Vietnam's 20 percent and Cambodia's 12 percent. Nonetheless, progress in achieving Lao PDR's revenue potential will be slow due to inadequate technical capacity of revenue administration and a highly decentralized revenue administration in which provinces currently have weak incentives to collect and remit revenue to the national budget. In early 2004, the Government took several corrective measures: re-establishing central control over seven main international checkpoints with revenue collected deposited into central government accounts; increasing control over major provincial large tax-payers units, modifying regulations to provide greater control by the center over granting of tax exemptions to investors; and frequent monitoring of provincial revenue collection and remittance to the national budget. Butmore will needto be done ifthe revenue share of GDPis to reach its potential. Figure 1: Economic Performance GDP Growth (YO)and CPI (Oh),1996.2004 FDI in Lao PDR (US$m) 4 G D P (left axis) +Inflation (rightaxis) Approved W Actual 7.3 160 6.0 6.9 492 503 140 500 120 450 400 100 350 80 300 250 60 200 40 150 7.8 10.6 15" 10.5 20 100 50 0 0 96 97 98 99 00 01 02 03 04 I 2000101 2001/02 2002/03 200304 Revenueand Expenditure (% of GDP) I I Current Account Balance (% of GDP) I -Revenue, incl grants -Expenditure +Deficit 1 2 5 1 I:i -2 20 -4 -6 -8 -10 -12 I ' I -10 1 1 Excludingofficial transfers Includingofficial transfers Source: IMFand Lao authorities A 28 12. Lao PDR is increasing its integration, both regionally and globally. Sub-regionally, Lao PDR i s an active partner in the emerging Greater Mekong Subregion (GMS) Economic Cooperation Program (consisting of Thailand, Myanmar, Yunnan province of China, Vietnam, Cambodia and Lao PDR). The GMS program has strategic importance in terms of potential exports (including hydropower and mineral products) to rapidly industrializing neighboring countries, the development of transport corridors, and sustainable development and management of the Mekong River. Given that most of its trade and foreign investment relations are with these countries, including sale of hydropower, ongoing GMS initiatives are supported strongly by Lao PDR. Lao PDR also participates inthe Mekong River Commission which explores opportunities for regional cooperation in the Mekong River basin. On a broader regional and global level, Lao PDR has been integrating gradually into the world economy since the 90s; itjoined the ASEAN and the AFTA in July 1997; signed a bilateral trade agreement with the United States in 2003, which require the Government to open up services over time; was granted Normal Trade Relations (NTR) status by the UnitedStates in November 2004; and has applied for World Trade Organization (WTO) accession; the first WTO working party meeting was held recently. Implementation of commitments under AFTA, the United States bilateral trade agreement, and WTO are opening, and will continue to open, further trade in goods and services sectors and investment within the region and globally. The granting of NTR by the United States and early harvest program from China, as well as application of lower Common External Preferential Tariffs (CEPT) on exports to ASEAN countries, further expands export opportunities for Lao PDR. Foreign direct investment (FDI) trends are significant relative to the size of the economy, although there are year-to-year fluctuations in flows, depending on the timing of large hydropower or mining projects. The Government i s working on a decree regarding financing of terrorists, has established an "Anti-Money Laundering (AML) Information Center" to monitor suspicious transactions, and i s preparing an AML law. Year Lao Area Region Priority District Altitude PDR Urban Rural Vien Nor. Cen. Sou. First Second Other Low Mid Up 2002103 32.9 19.6 37.6 16.4 31.3 34.1 32.4 49.5 40.9 25.1 21.1 36.9 42.1 1997198 39.1 22.1 42.5 13.5 41.3 39.4 39.8 63.0 41.1 30.5 1992193 46.0 26.5 51.8 33.6 51.6 45.0 45.1 A 29 Lao PDR Lao PDR Sub- Indicators 1990 Latest EAP Saharan Primary completionrate 74 100 48 Access to safe water (percentof population) 39 31 76 58 Physicians(per 1,000 people) 0.2 0.2 1.7 Pavedroads (percent) 13.8 15 21.2 12.9 A 30 16. Vulnerability remains high, especially for ethnic minority and upland communities. Forty-eight percent o f the population belongs to one of the 49 ethnic minority groups. Most live in the upland areas where livelihood systems are delicately balanced and poor communications exacerbate the challenge of providing social services. Each ethnic group has its own culture and traditions that dictate cropping cycles and patterns, as well as inheritance, health care, and life cycle events. This rich cultural diversity makes service provision complex. The relationship between people and the environment in these fragile, yet resource rich areas, i s easily upset. Roads and infrastructure, essential for improving access to services and developing natural resources, also bringthreats of logging and unsustainable development, and programs that aim to limit opium production or stabilize shifting cultivation ("swidden") may raise the risk of reducing access of upland communities to the forests and forest products on which they depend. The safety net system in Lao PDR i s underdeveloped and vulnerable groups are especially susceptible to shocks that affect rice yields and livestock. A further complication i s the severe contamination b y unexploded ordnance (UXO) in ten of 18 provinces, which adds costs to infrastructure development and contributes to poverty by limiting agricultural production. With respect to labor conditions, Lao PDR has ratified only one o f the fundamental labor standards conventions (No. 29 on Forced Labor), although another five conventions are currently under consideration. While the Lao Labor Law does conform in principle to some basic labor standards, it does not offer adequate enforcement. Anti-discrimination legislation also exists but enforcement i s again weak. 17. Progress has been made in improving the well-being of women, but significant challenges remain. At 27.3 percent, women's participation in the National Assembly i s one of the highest in the region and the Constitution and laws provide for gender equality. A new law on the Development and Protection of Women also provides a legal framework for addressing domestic violence and trafficking in women and children. Progress has been made in improving social indicators for females and the majority of small businesses in Lao PDR are run by women. However, despite the progress, maternal mortality i s still one of the highest in the region at 650 per 100,000. Lao PDR women work on average one hour a day more than Lao PDR men, and rural women, especially, bear the main responsibility for ensuring food security for the family. Greater gaps and inequalities can be found in rural areas, especially among ethnic minority women. Within the rich diversity of cultures lie social norms, local beliefs, and marriage and inheritance traditions that discriminate against or marginalize the groups of women they affect.6 Increased migration has led to greater vulnerability of women and children to traffickers. For example, literacy rates for the majority Lao PDR Phutai are 84 percent for males and 62 percent for females, while among Hmong-Yao ethnic groups it i s 45 percent for males and only 8 percent for females. A 31 Figure 2: Progress Toward MDGs, Selected Indicators Primary Completion Rates Child Malnutrition r-- I I -Actual 4 A c t u a l - - Trend to reach -- Trend to reach ~ MDGs ~ ! 1990 1995 2000 2005 2010 2015 Under-5 Mortality Rate I Maternal Mortality u)200 700 I rr -Actual 150 =!!100 +Actual @ -- Trend to - - Trendto reach v- 50 reach l L o 04- 1990 1995 2000 2005 2010 2015 2020 A.4 Governance Issues 18. Lao PDR governance indicators stand below regional and global averages.' In 2003, Lao PDR's Country Policy and Institutional Assessment (CPIA) ratings for key governance indicators were below the IDA average (Figure 3).* Lao PDR was close to IDA averages for property rights and governance, and for revenue mobilization, but it was lower on budget and financial management, and seriously lower on transparency and accountability. The IMFranked Lao PDR's public expenditure systems below that of 24 Highly IndebtedPoor Countries (IPC). With respect to the legal andjudicial framework, a body of law i s slowly being developed and applied in the courts. The lack of distinction between the executive and the judiciary hampers their enforcement and transparency remains a key issue. Weak and arbitrary legal enforcement, excessive business license requirements and lack of clarity on property rights continue to affect private sector development. The financial management system and fiscal reporting remain underdeveloped, with minimal reporting, auditing and accounting standards. Tax administration i s improving, but remains weak, especially in customs, where illegal cross-border trade continues with neighboring countries. Civil service reform i s needed to address incentive issues, given the current low salarieshenefits and opportunities for rent-seeking behavior. * The data inFigure 2 on MDG trends reflect household survey data from 2000. The 2004 CPIA exercise i s currently underway with a new ratings methodology in place, but will not be completed before April 2005. A 32 19. I n April 2003, the Government developed a governance reform program' based on actions infour priority areas: (i)public service reform; (ii)people's participation; (iii) the rule of law; and (iv) soundfinancial management.Efforts are underway on a pilot basis to improve the management of public administration through increased professionalism and merit-based recruitment. Other efforts to improve public sector management include drafting an anti- corruption decree, increasing transparency in the accounting and audit functions, improving tax administration and establishing checks and balances in the civil service. Work on strengthening participation, encouraging local empowerment and clarifying roles of central and local authorities i s continuing, as i s progress to strengthen judicial reform and public financial management, including fiscal planning, budget preparation, revenue and expenditure management and financial legislation and regulations. Figure 3. Lao PDR's2003 CPIA incomparison with IDA Averages Governance 1.MacroeconomicBalances 20. Transparency&Accountabili Economic Management 19. PublicAdministration 18. RevenueMobilization 4. Development Program 17. Budget and Financial Management 5. Trade and FX 16. Property Rights and Governance 6. FinancialStability 15. PovettyAnalysis and Monitoring 7. Banking Efficiency 14. Social Protectionand Labor 8. Private Sector Environment 12.Equityof Public Resource Use 10. Environment Social/ Equity - - 11.Gender Structural Lao PDR IDA Averages1 ~ A S Capacity 20. Capacity constraints are a signifcant challenge in Lclo PDR and contribute to poor performance on CPIA indicators. While public sector staff i s educated," gaps in incentives, competencies, and skill types and distribution prevent key functions from being performed effectively. Shortages of management and technical skills in finance, accounting and procurement are particularly acute. Organizational structures and basic management systems are not aligned with development priorities. Centralized decision-making often discourages local initiatives, while low pay levels, delays in payment (especially in rural areas), and lack of performance-based promotions may act as disincentives. Distinctions between legislative, Government of Lao PDR, Progress Report to the Governance Round Table Meeting, November 2004, following up on the Government's earlier report, Priority Areas for Governance Reform: Public Service Reform, People's Participation, Rule of Law, and Sound Financial Management, Round Table Process, March 2003. lo Over 90 percent of civil servants have some form o f post-secondary qualification and around 10 percent have university-level qualifications (Source: Department o f Public Administration, Prime Minister's Office). A 33 executive, and judicial functions are blurred. Decision-makers are often isolated from the civil service and conversely, civil servants are often poorly informed about government policy, legislation and even administrative procedures. Government controls on private sector activities include cumbersome investment procedures and annual tax licenses. While the Government has expressed strong preference for local expertise to provide technical assistance, there are few consultants with the requisite skills, often hinderingdonor efforts to build capacity. 21. The Government is taking a number of steps to address capacity constraints. Community development projects and activities are building capacity at the field level to prepare, implement and monitor outcomes of local investments. Recognition of the challenges posed b y ASEAN and WTO accession has spurred openness to learning from the experience of China, Malaysia, Vietnam, Lao PDR, and Thailand and have encouraged growing ties with neighboring countries and an examination of their reform processes. Civil servant training has been expanded and diversified, and modern public sector and economic management concepts have entered the curriculum of degree courses. B. The Power Sector inLaoPDRand Thailand B.l LaoPDR Key Sector Issues 22. The main challenges facing the power sector inLao PDR are: Electrifyinga Sparsely Populated Country 0 Providing electricity access to a thinly spread rural population of 5.7 million with a density o f 23 personshq. km, the lowest in the region; 0 Raising the electrification ratio from the current level of about 43 percent (25 percent in rural areas) to 90 percent by 2020; 0 Developing sustainable mechanisms (including renewable energy options and isolated cross-border imports) for electrifying areas remote from the grid; and 0 Making electricity affordable to the population in a country with a national per capita income of US$340 (and inrural areas well below this level). ExploitingLarge Hydropower Potential 0 Developing hydropower resources to meet domestic needs and earn export revenues in a manner that i s environmentally and socially sustainable and maximizes the overall economic benefit to Lao PDR. EnablingNational IntegratedPower SystemPlanning and Fulfillingthe GMS Goals 0 Interconnecting the separate grids to facilitate least-cost generation expansion on a nationwide basis, permitting optimized utilization o f generation resources; 0 Strengthening and expanding interconnections to neighboring countries (Thailand, Vietnam, Cambodia and China) to facilitate export o f power (and opportunistic imports), first on a project-by-project basis and, ultimately, realizing the goal of integrated development and operations under the GMS. A 34 Financing the Expansion 0 Developing methodologies for transparent procurement of hydropower resources conducive to least cost development; and 0 Developing financing models to attract an appropriate mix of public and foreign and local private financing to power sector expansion. Commercializing a Financially-Stretched Utility (EDL) and Rationalizing Tariffs 0 Removing barriers to autonomous operation of EDL and achieving an arms-length relationship with the Government; and 0 Developing a tariff policy that balances the conflicting needs of ensuring EDL's commercial viability and the social obligation to provide affordable electricity to poorer consumers in the country. Power Sector Policy Framework 23. To stimulate socio-economic development, GOL prepared the National Growth and Poverty Eradication Strategy (NGPES), which was approved by the National Assembly in October 2003. The three pillars of the NGEPS are: (i)foster economic growth with equity; (ii)develop and modernize Lao PDR's social and economic infrastructure; and (iii)enhance human resource development. The power sector i s central to achieving NGEPS goals, with rural electrification (RE) contributing significantly to poverty alleviation at the village level and revenues from hydropower exports contributing to the national budget and growth in general. In 2001, the Ministry of Industry and Handicraft (MM) issued a Power Sector Policy Statement setting out four policy goals: 0 Maintain and expand an affordable, reliable and sustainable electricity supply in Lao PDRto promote economic and social development; Promote hydropower exports to earn revenues to meet GOL development objectives; 0 Enhance the legal and regulatory framework to underpin power sector development; and 0 Strengthen institutional structures, clarify responsibilities, streamline administration and foster commercialization. Rural Electrification 24. Lao PDR covers an area equivalent to that of Great Britain but with a population of only around 5.7 million. Its population density of 23 persons/sq. km. i s the lowest in the region. Despite this sparseness, EDL's electrification performance has been impressive. Electrification rates have increased from 16 percent in 1995 to 43 percent by the end of 2004, with household connections increasingfrom 120,000 in 1995 to 425,000 in 2003. Yet the electrification coverage in rural areas is much lower at about 25 percent. GOL has ambitious plans to reach 90 percent electrification by 2020. As electrification moves to remote areas, grid-based RE becomes less viable and this has led GOL to promote off-grid models, with emphasis on renewable technologies. Supportive of this strategy i s IDA'S proposed Adjustable Program Loan - "Southern Provinces Rural Electrification 11" Program, SPRE2 (see box). A 35 SPREZ Program 1. Objective: To improve, through electrification, the living standardsof 123,500 rural households (25 percent of GOL connections target 2004-2020). Eight percent of the program would be financed by non-traditional funding, induced by the project. 2. Phase 1Project: (US$20 million IDA, US$3.75 million GEF), implemented over 36 months, would finance electrification of 52,000 households (10,000 off-grid). I t would promote development of the legal, regulatory and institutional framework, encouraging other participants in sector development, provide a sound planning basis for electrification and increase the efficiency of electricity delivery and consumption. 3. Phase2 Project: (US$25 million IDA, US$1.25 million GEF), implemented over 39 months, would finance electrification of 71,500 households (20,000 off-grid). Complementary financing would come from non- traditional sources and savings from improved sector efficiency. The Phase 1Project also includes: 0 Rural Electrification Fund(REF): Setting up of a REF to finance off-grid RE. Tariff and Subsidies: Phased implementation of an Action Plan. Power Sector Financing Strategy: Development of a strategy and preparationof small hydropower projects for solicitation. Demand Side Management (DSM): Setting up a framework for DSM. Hydropower Developmentand Integrated Least-CostPower DevelopmentPlanning 25. Lao PDR has prodigious hydropower resources but no confirmed oil or gas resources. Technical hydropower potential i s estimated at 26,500 MW, but only a small fraction has been developed, providing substantial exports and 97 percent of the country's generation needs. Most hydro energy i s exported to Thailand while imports from Thailand provide energy in grids with no generation capacity and cover peak hour and dry season shortages in other grids. EDL hydropower stations can currently generate on average about 1,514 GWh annually. They are complemented by two independent power producers (IPP, namely Theun-Hinboun and Houay Ho) which produce an additional 1,600 GWh annually for export. As national power demand (250 MW, 906 GWh in 2003) grows at a 12 percent rate, EDL's net exports will progressively reduce over the coming years. Nam Theun 2 marks a new strategy in which EDL would meet increasing domestic demand through off-take from larger IPPs designed primarily for export. This strategy holds significant advantages in benefiting from economies of scale, although there may continue to be a need for smaller, national projects to meet local demands or to compensate for fluctuations in investors' appetite for larger regional projects. 26. An IDA-supported study, "Power System Development Plan", ranks the following economically feasible hydropower projects (Table 3): l1Maunsell / Lahmeyer International, August 2004. A 36 Rank Project ProjectType Capacity Energy Cost" (MW) (GWhp.a.) ($/kWh) 1 Nam Theun 2 StorageItransfer 1074 5922 1.6 2 T h e m Hinboun Extension Storage Itransfer 105 142 2.4 3 Nam M o Storage 125 603 2.7 4 Xe Kaman 3 Storage 300 1369 2.8 5 Xe Kaman 1(dsreg.) Storage 470 2086 3.1 6 Nam Ngum 2 (dsreg.) Storage 460 1901 3.2 7 Xe Kong 5 Storage 400 1795 3.2 8 Nam Sane 3 Storage 60 283 3.3 9 Nam Ngiep 1( reg dam) Storage 330 1537 3.8 10 Xe Kong4 (dsreg.) Storage 490 2257 3.8 11 Nam Ngum 3 I3B Storage 530 1690 2167 I2859 4.1 13.9 12 Houay Lamphan Gnai Storage 60 250 4.0 13 NamPot Storage 25 99 4.6 14 Nam Ngum 5 Storage 75 3 17 5.4 15 Nam Bak 2B (dsreg.) Storage Itransfer 85 389 5.6 16 NamLong Storage 12 63 6.2 17 Nam Sim Storage 10 47 7.1 18 Thakho R-o-R IMekong 30 214 7.2 19 Xe Katam Run-of-river 13 60 8.1 20 NamNeum2B Storage 140 196 8.7 27. While none of the projects on the list (apart from NT2) have been committed, a few of the most attractive schemes are at very advanced stages of preparation and are expected to achieve financial closure within the coming years. 28. Lao PDR has no national grid; four separate transmission systems supply four regional centers. Each center has strong cross-border interconnections and nearby sources of hydropower, The two largest consumption centers, Central 1 and Central 2, will be interconnected by 115 kV lines around 2008, supported by financing from Japan Bank for International Cooperation. Notwithstanding this, reliance on imports will continue to supply peak demand and to serve as stabilization. Accordingly, EDL's power development planning would continue largely on a regional basis. In the long term, all four grids would be interconnected enabling more economic planning and operation. Electricity Trade with Neighboring Countries 29. Electricity trading i s carried out at several levels: (i) committed exports under project- specific power purchase agreement (PPAs)12that set out strict conditions governing delivery of capacity and energy; (ii)an agreement between EDL and EGAT under which EDL can meet shortages through imports and can freely export surplus energy; and (iii) opportunistic power trading for supply to Lao border areas from Thailand, Vietnam and China. In 1993, G O L signed an M O U with EGAT whereby EGAT agreed to purchase 1,500 MW by the year 2000. In 1996, a At present, PPAs have been signed only with EGAT (Theun Hinboun, Houay Ho and Nam Theun2); but several others with both EGAT and EVN (Vietnam) are under active negotiation. A 37 second MOU was signed whereby EGAT agreed to purchase an additional 1,500 MW by 2006. Neither of these targets has yet been met. 30. Given the country's location between populous and rapidly developing neighbors, the development of the Lao power system i s taking on an increasingly regional dimension. Greater Mekong Subregion Regional Grid Development - 31. Power trade in the Greater Mekong Subregion holds the potential for significant economic and environmental benefits, with a direct impact on poverty alleviation in the region. Numerous studies have quantified the benefits of power trade. One study concluded that full trade could yield cost savings of at least US$10 billion until 2020, and a reduction of airborne pollutants valued at US$120 million a year. Another study estimates that the extended cooperation scenarios, just on the network side, could result in costs savings ranging from US$0.9 to US$1.3 billion in the period 2005-2020. 32. A large amount of groundwork has been done with support from the Asian Development Bank (ADB) and the World Bank to shape the development path of the GMS power trade market. The GMS Power Forum was established in 1992, and has met regularly since then. In 1997, the Bankjoined the Forum and associated Experts Group, and since then has supported the Forum through a series of studies and related work. In 1999, the Bank's economic sector work identified a number of barriers to the development of a regional power market and proposed a strategy to remove them. In June 2002, an indicative regional master plan for interconnection, fundedby ADB, was completed. In 2003, a market structure options study funded by the Energy Sector Management Assistance Program (ESMAP) and the Bank helped raise awareness about the various dimensions of a future market. An ADB-funded study on a regional power trade operating agreement hasjust been completed. 33. Recent developments among GMS member countries indicate a new phase of power trade market development: 0 In 2002, the six GMS member countries signed an Intergovernmental Agreement on Regional Power Trade (IGA), culminating years of collective effort in conceptualizing a regional power trade market. With the initiative entering a new phase, there i s now consensus among all parties involved that while a full-fledged power market will be at least 10-15 years away, transmission infrastructure will need to be built up gradually, initially to meet the needs of bilateral agreements. There i s also concerted endorsement of private sector participation in sector development in all six countries. 0 Inaccordance with the 2002 IGA, inmid-2004, the parties convenedinGuilin, China, for the first meeting of the Regional Power Trade Coordinating Committee (RPTCC), a high- level regional coordination group entrusted with guiding the development of the regional market. China has been elected as the first (rotating) chair of the Committee. 0 The region is witnessing an upsurgeof investor interest in the power sector, and bilateral agreements are also gaining momentum. 34. The Bank's GMS strategy and operational initiatives are summarized in the box below: A 38 Bank's GMS Strategy The Bank's strategy for supporting the development of the GMS power market is to leverage its involvement to gradually build both the institutional and the physical infrastructure framework that will create conditions towards an integrated power system for the longer-term. In the short-term, this implies (i) providing much-needed technical assistance to the RPTCC; and (ii)harnessing bilateral power trading arrangements to construct the physical infrastructure, without resort to government budgets. This proposed regional strategy, to be implemented over an 8-10 year time horizon, complements, and is consistent with, ongoing and proposed sector - and country - specific Bank strategies and initiatives, as well as those of other donors active inthe sector in the region, notably the ADB. Support for both physical infrastructure and institutional development investments is envisioned through a horizontal Adaptable Program Loan. Preparation of this component is well on its way and understanding has been reached with the Governments o f Lao PDR and Cambodia for the financing o f cross-border transmission projects between these two countries and possibly for another component, transmission between Vietnam and Thailand. Support would also be provided for RPTCC institutional development. Commercialization of EDL 35. While commercialization of EDL has been underway since 1987, and major impetus was given to this process with its incorporation in 1997, there is a still strong interrelationship between government and EDL finances. In particular, there i s confusion among the Government's various roles as: owner of EDL, regulator of EDL, on-lender of loans received by GOL, tax collector and electricity consumer (in relation to which EDL carries large receivables from government agencies). Thus, there i s frequent resort to offsetting to enable EDL to meet financial covenants with its lenders. While considerable progress has been made in straightening out finances under the Financial Recovery Plan (FRP) described below, it i s important that this inter-relationship i s made more transparent and predictable. 36. EDL Finances. In the wake of the regional financial crisis, EDL's financial situation deteriorated to a point where it became technically bankrupt. With the assistance of IDA and ADB, an FRP was put into place, whose key ingredients were: (i) conversion of a large portion of debt to equity; (ii) temporary relaxation of on-lending terms of remaining loans by GOL, IDA, ADB and the Nordic Development Fund (NDF); (iii) monthly increases in electricity tariffs of 2.3 percent -effective May 2002 to June 2004; (iv) revaluation of fixed assets, enablingEDLto charge more depreciation and, thus, pay less income tax; (iv) pruning of EDL's capital expenditure program; and (v) settlement of overdue government accounts. Due to implementation of the FRP, application of proceeds from refinancing o f Theun Hinboun Power Company (THPC) (US$33 million) for retirement of long term debt, and dividends from THPC of Kip 124 billion inFY02, EDL's current financial situation i s satisfactory. 37. A comprehensive tariff study carried out in 2004 concluded that, while current tariff levels, if maintained in real terms, are adequate to allow EDL to meet financial covenants, EDL currently receives a subsidy of about 17 percent of the cost of its domestic operations, primarily through net export revenues from its own plants and IPP dividends. Moreover, the tariff structure i s highly distorted in favor o f residential consumers - particularly smaller and middle level consumers. A 39 38. Action Planfor Financial Sustainability of the Power Sector. Inview of the findings of the tariff study, it was agreed that the Government will prepare an Action Plan for Financial Sustainability o f the Power Sector, in consultation with the World Bank, with a view to adopt it by May 2005. The existing draft Tariff Action Plan will form a key input. The objectives of the Action Plan are to achieve: (i) financial sustainability of EDL's operations through efficiency improvements and gradual reduction of subsidies, while also delivering affordable electricity to as many Lao consumers as possible; and (ii) a tariff structure providing correct incentives for efficient usage o f energy. Both parties agreed the following principles to guide the preparation of the plan: EDLshould be financially viable inits own right without havingto rely on revenues from i t s export earnings. The provision of electricity services entails obligations of both suppliers and consumers. Suppliers should provide an adequate service, and consumers should pay for it. Capital subsidies from the Government for rural electrification and other socially oriented projects could be justified, though not for generation and transmission. Operating subsidies should be avoidedif at all practicable. Financial covenants have been previously agreed with IDA and ADB and it i s important that EDLmeet these covenants as indicators of satisfactory financial performance. The price of electricity i s a signal to consumers about its value. Cost-based electricity prices contribute towards economic allocation of resources on the supply and demand sides. When the price i s set below the cost o f supply (when it i s subsidized), consumers respondto this signal b y over-consuming. o Since EDL exports to, or imports from, EGAT in all of its grids, a subsidy to residential consumers results in reduced export earnings and increased import costs, thus deterioratingEDL'sfinancial position. o Moreover, existing cross subsidies (from non-residential to residential) force non- residential consumers to pay more than their share of the cost of electricity, making their products more expensive and less competitive. With current gross distortions inthe tariff structure, it is recognizedthat adjustments need to extend over several years so that the Plan i s socially feasible. At the end of the adjustment period tariff levels should remain affordable to poorer consumers. Since EDL's costs are largely in foreign currency, tariffs need to be periodically adjusted to maintain their value inforeign currency terms. Tariff structure adjustments need to be accompanied by other reforms to reduce supply costs. Sources of inefficiency andor additional measures to be addressed are: o Reducing arrears of public consumers. o Reduce supply side losses. EDLsystem losses are currently about 20 percent. With an aggressive loss reduction program, it should be possible to cut these to about 12percent. A 40 o Competitive procurement of new generation. Procuring new generation on a directly negotiated turnkey basis increases costs above what could be achieved with competitive bidding. o Demand side management programs are also capable of reducing costs to consumers; program components targeted at subsidized consumers will also improve EDL financial viability. o There i s room for efficiency improvements in EDL, e.g. extension of computerized billing systems; and improvements infinancial management information systems. 39. EDL Income from Hydro Exports. EDL has been appointed as the Lao nominee shareholder for the two existing IPP projects. These dividends represent significant amounts of EDL's non-operating income. The GOL would like these dividends to come under the overall country revenue management policy and not under the corporate finances of EDL. Following a consulting study, the GOL has established the Lao Holding State Enterprise (LHSE), a special purpose company, that would receive and manage N T 2 revenues. This option would provide: (i) a clear separation of NT2 dividends from EDL's accounts; (ii)maximize the non-financial advantages to EDL; (iii)not require special legislation; (iv) be relatively inexpensive to maintain; (v) comply with Lao tax and company laws; and (vi) maintain EDL's ability to comply with its existing legal covenants with lenders. ADB i s conducting a further study for P P development and institutional restructuring, which would recommend an appropriate government agency to own and manage the Government's future IPP equity investments. It i s expected that the LHSE would act in this capacity. 40. Financing of Power Development. GOL has traditionally received concessionary financing from multilateral and bilateral agencies for power sector development. While power sector capital requirements are increasing, the sector's traditional lenders are shifting their programs to other sectors. On the other hand, non-traditional, regional lenders, e.g., China and India, are playing an increasing role through the provision of export credits (with significant grant element) for projects where goods and construction services are sourced from their respective countries. A Power Sector Financing Study was carried out as part of project preparation for the SPRE2 Phase 1 project. Development of a power sector financing strategy and implementing of certain elements will be carried out under the proposed SPRE2 Program. B.2 ThaiPower Sector 41. General issues that have a bearing on the N T 2 Project are outlined below. The growth of demand in Thailand (also in Lao PDR), the impact of D S M and renewable energy development on the Thai demand forecast and the economic and financial justification for N T 2 are addressed inAnnex 11A. Paucity of Domestic Energy Resources and Concerns about Energy Security. Thailand i s a net importer of energy, importing about 63 percent of its commercial energy demand, and the trend i s increasing. With rapidly growing energy demand, domestic reserves will be woefully inadequate to accommodate a reasonable portion of the consumption. Government has proposed that Thailand would be a Regional Energy Center (a hub for energy trading) and has established tax free zones on Si Chang Island and at Sriracha, in the south, to promote oil trading and oil export. It has also planned for a Strategic Energy A 41 Land Bridge, comprising a 230-kilometer oil pipeline connecting the coast of Andaman to the Gulf of Thailand to link oil production sources in the Middle East and South Asia to the major consuming centers in Southeast Asia. 0Difficulties in Sourcing Electricity Supplies. While the financial/economic crisis of 1997-2001 depressed electricity demand and resulted in inordinately high generation reserve margins, the situation i s now rapidly changing and electricity demand i s projected to grow from a current level of about 17,000 MW to about 36,000 Mw by 2015, after allowing for D S M measures to reduce demand. Such a level of growth i s not expected to be sustained b y domestic natural gas and coal. Efforts to source electricity from other sources pose serious problems: (i) domestic IPPs based on imported coal - opposition from people; (ii) domestic lignite-based generation - opposition from people due to past bad environmental pollution experience at Mae Moh; (iii) of hydro power from import Laos - opposition from national and international NGOs to hydropower development per se; (iv) generation based on imported pipeline gas from Myanmar and Malaysia - opposition to construction of gas pipelines; (v) imported LNG-based generation - cost considerations. Restructuring the Electricity Supply Industry (ESZ). Plans for the introduction of a competitive power pool (which could have a bearing on the operation of Nam Theun 2 after 15 years, as per the PPA), which would have introduced wholesale and retail competition over the next three to four years, have been scrapped. This was largely due to opposition from utilities to break up their domains, opposition from unions (currently a serious issue in corporatization) and uncertainties about the complexity of pool operations. The Government has decided to adopt the so-called Enhanced Single Buyer Model for the ESIwhich provides for: (i) EGAT continuing to be a sole buyer, dispatcher and bulk transporter of electricity; and (ii)EGAT, MEA and PEA introducing "accounting separation" for each of their business units.EGAT, MEA and PEA would be corporatized as a whole and listed on the stock exchange. 0 Power Demand in Northeast Thailand. The distribution of power demand and generating capacity across Thailand indicate that, apart from metropolitan Bangkok, the NE Region is the only part with a deficit in generating capacity. Exports from the Nam Ngum, Nam Theun and Xe Kong hydro projects inLao PDR are strategically located to meet this deficit. A 42 Annex 3: Decision Framework for the N a mTheun 2 Project L A O PEOPLE'S DEMOCRATICREPUBLIC NamTheun 2 HydroelectricProject andNamTheun 2 SocialandEnvironment Project Significance of the NT2Project 1. Although the Bank has been active in Lao PDR for many years, NT2 i s far larger and more complex than any project contemplated, thus far, by the GOL or the Bank. Given the context inLao PDR described above, the NT2 Project promises highrewards but also poses high risks. Because o f this and also by virtue of its size and environmental and social implications, it plays a major role in shaping the policies and development agenda of the GOL dialogue with the donor community. It also has high visibility in the NGO community, where there i s a full spectrumof views about the advisability of developing the project. 2. NT2 would be the first major dam project to be prepared since publication of the Bank's new Water Resources Sector Strateg~.'~The Project provides an opportunity to demonstrate the possibilities for developing a clean and renewable resource to help meet Southeast Asia's growing energy demand. The NT2 Project i s being viewed b y some parties as a test case for the Bank to demonstrate that it can promote responsible hydropower development, consistent with its environmental and social safeguard policies. It i s also a test case for some parties for the Bank to demonstrate that it can successfully operate partnerships with its client countries that lead to governance improvements, sustainable development and an equitable sharing in the benefits of large dams that includes those directly affected. 3. Considering the importance and size of the NT2 project in the Lao context, and the high risk, highreward nature of the project, the Bank created a Decision Framework that would apply to a Bank decision on support to the project. This framework was agreed to inprinciple with the GOL in August 2001, has been reaffirmed frequently since, and was brought to the notice of the Bank's Board during the presentation of the Lao PDR Financial Management Adjustment Credit (FMAC) project in June 2002. This original document was posted on the Bank's NT2 project website and i s Attachment 1to this Annex. Progress registered on implementing this framework i s covered in the relevant sections of the PAD, and, with regard to its first component ("development framework"), in the PRSC Program Document. The GOL i s committed to implement the objectives of the Decision Framework during the implementation phase of the project. This i s embodied in a Government Letter of Implementation Policy (GLIP-Annex l), which complements the Letter of Development Policy o f the Poverty Reduction Support Credit (PRSC-1). l3 Water Resources Sector Strategy: Strategic Directionsfor World Bank Engagement, approved by the Boardof Directorsof the World Bank, February 25,2003. A 43 4. The GLIP asserts the Government's commitment to: e Continue to build a viable development policy framework and programs for poverty reduction and for social development and environmental protection, using the National Growth and Poverty Eradication Strategy (NGPES) and the Social and Economic Development Plans (SEDP) as drivers; e Focus on effective implementation of the technical, financial and economic aspects of the project, as well as of the environmental and social safeguards activities; and e Further strengthen support from the international donor community and global and local civil society for poverty reduction programs and associated development plans, and facilitate their involvement during the implementation of the Nam Theun 2 project itself. 5. The GLIP also describes in detail risk mitigation activities in critical areas. These relate - to: (i) revenue management; (ii) environmental and social safeguards; and (iii) monitoring and evaluation. A 44 Attachment 1 to Annex 3 Decision Framework for Processingthe Proposed NT2Project14 Proposed NT2 Project 1. The proposed private sector investment project includes the development, construction, and operation o f a thousand Megawatt trans-basin diversion power plant on the Nam Theun river, a tributary of the Mekong, inthe central region of the country, about 250 kilometers east of Vientiane. The main features of the project are a 48-meter high gravity dam on the Nam Theun River, a 450 sq. km. reservoir, the powerhouse, and a 130 km long double-circuit 500 kV transmission line to deliver the electricity produced to the Thai grid. A 70 km. long single circuit 115 kV transmission line will also be included to carry the small portion of total electrical output that will be dedicated to domestic uses. 2. The project i s structured as a BOOT (Build-Own-Operate- Transfer) arrangement. The Government asked a foreign consortium, Nam Theun 2 Electricity Consortium (NTEC), comprised of EDF (France) in a head-contractor partnership with Montgomery Watson Harza of U S A (35 percent), EGCO of Thailand (25 percent) and Ital- Thai Development also o f Thailand (15 percent), to assist in constructing and operating the project. NTEC, currently representing the private sector interests, will shortly be incorporated with the Lao Government's investment entity (Electricit6 du Laos, with 25 percent of equity) to form the operating company, Nam Theun 2 Electricity Company (NTECO), for a concession period of 25 years. The developer has informed the Bank that it expects to sign, by September 2002, a Power Purchase Agreement (PPA) with EGAT (the Thai public-sector power entity) for export of over 90 percent of the energy generated by NT2 and also sign a Concession Agreement (CA) with the Government of Lao PDRinthe same month. 3. Estimated project cost (excluding contingencies) i s US$1.075 billion (about 65 percent of GDP in Lao PDR) and is expected to be funded using loan facilities of $752 million and shareholders' equity of $323 million. Export credits to the tune of $270 million, commercial loans from Thai banks amounting to $375 million and commercial loans from developed countries' banks to the extent of $107 million, make up the loan financing ($752 million) for the project. Decision Framework for Processing the NT2 Project 4. A broad decision framework was shared with the Government of the Lao PDR during a Management mission led by the Country Director in August 2001. Project processing would be linked to progress shown by the Government on: (i)implementation of a development framework characterized by concrete performance that aims at poverty reduction and environmental protection; (ii) ensuring that the technical, financial and economic aspects of the project and the design and implementation of safeguard policies were o f a standard acceptable to the Bank; and (iii) obtaining broad support from international donors and civil society for the l4 This is the original document that was agreedwith the Government in August 2001. A 45 country's development strategy and the NT2 project itself. The three elements of the decision framework are elaborated upon below. 5. Policy and Institutional Reforms. Less than ten percent of the power produced b y N T 2 will be used in Lao PDR; the rest i s to be sold to Thailand. Therefore, the major benefit from the NT2 project would be sizable incremental revenues (through royalties, taxes and return on equity) flowing to the Government of the Lao PDR for several decades starting from 2008 --not the direct benefits of power production. Global experience has clearly shown that such additional revenues can be put to the most productive uses when governance improvements and human capital development go hand in hand with project initiatives. Currently, the policy and governance framework in Lao PDR i s flawed and capacity inthe public sector i s woefully weak. Substantial sustainable improvements to these policy and institutional areas are needed to achieve macro-economic stability and pave the way for sustainable broad-based growth. While it i s appreciated that such reforms take time to complete, a serious start and demonstrated progress i s necessary before sufficient confidence can be gained that these reforms will indeed be accomplished. Such demonstration i s all the more important to assuage lingering doubts in the community of international financial institutions and donors, dating back to the macroeconomic missteps taken in 1997-1999 that exacerbated the effects of the regional crisis. 6. The IMF-backed Poverty Reduction and Growth Facility (PRGF) and the government driven Interim Poverty Reduction Strategy Paper (I-PRSP) lay the foundations of such policy and institutional reforms. An overall poverty reduction framework (PRSP) i s needed to layout the strategy for the sustainable and environmentally responsible use of revenues derived from natural resources such as hydropower, forestry, and mining. The full PRSP, that i s expected to be discussed at the Bank Board in FY2003, i s expected to set the agenda for further Bank support through a series o f Poverty Reduction Support Credits (PRSCs) to strengthen governance and promote human development in Lao PDR. Furthermore, expected annual budgetary revenues from NT2 would be, in part, channeled directly to initiatives aimed at poverty reduction and a portion of the proceeds would also partially fund long-term conservation efforts (for several decades) in designated conservation areas. 7. Meanwhile, building on the efforts of the past SACSand the recently-completed Public Expenditure Review (PER), the Financial Management Adjustment Credit (FMAC) and its companion Financial Management Capacity BuildingCredit (FMCBC) seek to strengthen GOL's capabilities through financial and public sector reforms. Key areas being addressed include: (i) financial sector --stabilize financial condition of the banks (SCBs), strengthen banks to support broad-based economic growth, and launch micro/rural finance for poverty reduction; (ii) public sector -improve budget planning, streamline budget execution and control, make the budget process more transparent and launch participatory forestry framework which has significant budgetary implications; and, (iii)SOEs - strengthen oversight of financial and operational performance o f SOEs, restructure enterprises, rationalize the regulatory framework (power sector SOEs are addressed here as well - especially EDL, the entity that would carry GOL' s equity share in the NT2 project). A Poverty Reduction Fund (PRF) Project would complement these efforts through direct targeting of funds for poverty-reducing investments at the village level, A separate forestry operation will also address improvements in forestry management at the A 46 regional level. Improvements in public expenditure management would lead to better poverty targeting. 8. The health of the overall IDA portfolio in Lao PDR must also be addressed. There are nine active IDA projects inthe portfolio at this time. Inrecent years, performance of the portfolio has been mixed, but with an improving trend. 9. Success on the policy and institutional reform front will be measured through progress on the development and implementation of a comprehensive government-driven reform program, articulated in the PRSP and other policy statements and supported by the Bank, IMF and other donors through instrumentssuch as the PRGF,FMAC, PRSCs and various investment operations as well as maintenance of good standing on the overall project portfolio. Therefore, a sine qua non for Bank support to the project i s an agreement upfront on a set of policy and institutional reforms and demonstrated progress on the implementation of these reforms. Progress on all these operations will be guided and measured b y a set of performance benchmarks. This prerequisite for Bank support for NT2 has been accepted b y the Lao PDR Government. 10. Project Standards and Safeguards. The NT2 project i s being designed and will be implemented by NTEC (or NTECO). The head contractor - EDF/Montgomery Watson Harza - i s strong and each i s highly rated as a leader in the field. Therefore, unlike public sector energy projects, cost overruns or completion delays are not serious risks. The project sponsors have amassed substantial analysis affirming that NT2 i s technically sound in terms of hydrology and dam design and also economically and financially viable. The Bank i s in the process of reconfirming these findings through ongoing due diligence. The project i s well-managed to date and the Developer i s capable and responsive to Bank suggestions. NT2 i s a priority for the Government while also being financially attractive to the Developer. This provides incentive for all parties to find workable solutions when problems arise. With this said, the Bank must still, inter alia, perform due diligence on the PP A and other legal agreements covering the project, the case for additional power purchase by Thailand, the design of the dam and associated construction (a Bank supported Dam Safety Panel i s operating) and the detailed implementation arrangements. The satisfactory completion o f due diligence - and any remedial actions that the Bank may propose - i s an integral component of the Bank's decision-making framework for processing the project and this has been recognizedby the Lao PDR Government. 11. The NT2 project involves application of all ten Bank safeguard policies. The project demands effective conservation and management of the watershed areas due to possible negative environmental and social impacts. These relate to the construction of the dam and flooding of land to fill the reservoir. Other impacts include resettlement of nearly 5,000 persons, flooding of dry season cultivation zones on the Xe BangFai River, ecological impacts relating to changes in water quality and flow on the Xe Bang Fai and Nam Theun rivers, possible endangerment of certain rare fish and animal species, changes in the stock and migration of fish, and loss of habitat in the reservoir area from inundation. Unless these negative impacts are carefully mitigated, the net benefits flowing from the project may not be attractive enough to justify it. 12. Project preparation has focused on mitigating these negative impacts by ensuring that the design and implementation of plans pertaining to all of the Bank's safeguard policies are carried A 47 out so as to meet or exceed Bank standards. Furthermore, the proposed Nam Theun Environmental and Social Project (NTSEP) supports, inter alia, resettlement and community development, environmental capacity-strengthening, watershed area management and environmental mitigation, and poverty reduction in the project area. Through these efforts, the Government seeks to ensure that the livelihoods of all who live in the project area are enhanced and that the environment - in the project area and possibly beyond - i s conserved for the long term. Potential conservation benefits warrant special mention, as N T 2 would help to preserve one of the few remaining pristine rainforest regions in the world. Without NT2, it i s not clear if or how such conservation could be ensured. An independent International Advisory Group and a Panel of Environmental and Social experts advise the Bank and Government, respectively, on these critical issues. 13. The design of risk mitigation measures i s contained in three document packages (which are governed by the Bank's disclosure policy): the Environmental Assessment and Management Plan (EAMP), the Resettlement Action Plan (RAP) including an Ethnics Minorities Development Plan (EMDP), and the Watershed Conservation and Management Plan - also including an EMDP. The preparation of these plans has been carried out by experts working for the Government and the Developer, with substantial input from Bank staff (including the provision of detailed comments and discussions on application of Bank safeguards policies). Implementation arrangements are included in these documents and completion of this work, to the satisfaction o f the Bank, would be a pre-requisite for Bank consideration of the NT2 project. 14. A strong dialogue is inprogress with both the Developer and the Government on project quality and safeguard issues and there i s a clear understanding by all parties on the what must be done to comply with the Bank's guidelines andstandards inthis regard. 15. Broad-based Supportfor the Government's Development Strategy and the NT2 Project. Burden-sharing with other international donors i s a critical element o f the Bank's decision making framework because of two factors. First, it i s critical to the success of the project that sustained progress on reforms be maintained over the long-run. The Government would receive revenues for several decades and most of the policy and institutional reforms would also take several years to complete. The reforms are more likely to be fully carried out if major donors are also deeply committed to the policy and institutional reform package while also supporting the implementation of NT2-related conditionality. Second, the NT2 project requires substantial external support, through grants (to finance the Government's contribution to equity in the project), export credits, financial transfers, and technical assistance from donors other than the Bank. 16. These requirements put the international donor community in a crucial role going forward. The Government will need to develop a detailed program (buildingon ad hoc measures taken so far) for systematic consultations with key international stakeholders to keep them informed. For bilateral donors and the multilaterals, this will need to include briefing missions to important donor capitals as well as informal meetings in Vientiane. The UNDP supported round table mechanism would also be used to keep donors informed and engaged. This paper i s therefore being distributed to the Round Table meeting being heldin Vientiane on July 3, 2002. A 48 17. International civil society has a legitimate and strong interest in the project as well - particularly since local civil society i s not developed and there are no local NGOs. Local consultations have been remarkable in the Lao context, but fall short of the expectations of the international community. Broad support from international NGOs, particularly those involved with environmental and social issues, provides much-needed comfort that the environmental and social issues relating to the project will be successfully managed in the event. It is, however, highly unlikely that anti-dam NGOs would cease to attack this project. They likely will continue to launchfocused campaigns against NT2 -including website appeals reaching large audiences. 18. A series of seminars on NT2 led by the Lao PDR Government would be proposed to engage international NGOs on the project. The tone of these seminars i s likely to be set by the on-going debate on the World Commission on Dams report. The expertise of the International Advisory Group o f the Bank and the Panel of Environmental and Social experts, engaged by the Government, would be made available at these seminars. 19. The importance of broad-based international support i s well understood by the Government but their capacity to network i s severely limited. The Government i s seeking Bank advice on its communications plan. 20. Project preparation continues within the framework described above. Emphasis going forward will be on further development by the Government of specifics relating to safeguards, fiduciary elements, use of revenues, a strong communications plan, and monitorable benchmarks for determining Lao PDR' s policy and institutional readiness for the NT2 project. A 49 Annex 4: Major Related Projects Financed by the Bank and/or other Agencies L A O PEOPLE'S DEMOCRATIC REPUBLIC NamTheun 2 Hydroelectric Project andNamTheun 2 Social andEnvironment Project WORLD BANK DATA Ongoing IDA-financed Project Sector Issue Latest Supervision (PSR) Ratings (IDA-financed projects only) Implementation Development Southern Provinces Rural I I Progress(IP) I Objective (DO) Rural electrification and Electrification Project capacity-building inEDL S S (Cr. 17142-LA) and sector agencies Outcome Sustainability IDImpact Provincial Grid IntegrationProject Rural electrification and Cr. 2425-LA capacity-building inEDL S U M (completed in 1999) Southern Provinces Electrification Rural electrification and Project capacity-building inEDL Cr. 1826-LA (comdeted in 19941 I HS I I S B NamNgumExtension Project Hydropower extension and Cr. 1197-LA capacity buildinginEDL NR NR NR A 50 2cn I - Annex 5: ResultsMeasurementFrameworkandMonitoringandEvaluationArrangements LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectand NamTheun2 Social andEnvironmentProject A. ResultsMeasurementFramework Inputs outputs IntermediateOutcomes UltimateOutcomes By 2009 by 2015 Component1:i Hydro-Power Station Capacity of Francis Annual average export to 0Annual average operational. system at 500 kV not EGATnot lessthan 5,000 export to EGAT not O&MTeam less than Owner's GWh. less than 4,500 GWh. functional. specification. Annual average export to Annual average Capacity of Pelton 0500 kV Transmission 0 EDLnot lessthan 600 export to EDLnot System system at 115 kV level GWh. less than 800 GWh. commissioned. not less than Owner's 0 Reservoir silting (volume Reservoir silting 115 kV Transmission specification. loss) not more than 2 Mm3 (volume loss) not System 500 k V transmission [two million cubic meters] more than 30 Mm3at commissioned. system loss not more per annum. the end of 15 years. than Owner's specification. Storage capacity of Regulating Pond not less than 8.0 MCM. Strength of 0 & M team not less than 145. iocial Development Financing o f civil Village-level detailed All 17 villages relocated The resettled works, goods, designs for site and stabilized at the new population benefit technical assistance, planning and livelihood sites, within 3 years of from improved, training, cash development financial closure. stable and affordable compensation and basic services. extension services. All impacted villages Indicator: actual # of people moved into developed relocated versusplanned Household incomes Adequately staffed resettlement sites, with relocation. met and stabilized offices inNTPC and planned infrastructure above rural poverty RMU. and social services in Basic public and social services are provided and line, specifically: (i) 0Operational Village place; improved in all all resettler Facilitation Teams Alternative livelihood resettlement villages. household incomes with appropriate programs are rises to at least resources to undertake established and operate Indicator: village baseline US$820, at the participation. at household level, and versus resettled situation for basic itlfrastructure. social beginning o f the fifth Implementation resettler households and public services (both year after relocation; arrangements acquire new skills to quantitative and qualitative (ii)average including supporting practice improved or assesstnetit). aggregated village- GOL legislation and new form of level income rises to design of the livelihoods The resettled households at least US$1200, at downstream program. Affected villages in have started various the beginning o f the XBF andNT livelihood activities, with ninthyear after household income restored relocation. A 52 Inputs 0utputs IntermediateOutcomes Ultimate Outcomes By 2009 by 2015 downstream areas have and some transitional acquired skills to assistancegradually Affected villages in undertake new forms of phasing out. XBF and NT livelihood to maintain their pre- compensate for fish Indicator: Change in project levels of resettlement employment, losses and flooding. income and protein annual household income and equivalent from Affected persons in composition, as well as trend alternate livelihood XBF andproject lands in development. options during the receive compensation Inland rice-fish-livestock immediate years after for land and assets lost livelihood programs in COD. Necessary measures XBF andNT have an designed and increased share in implemented to address household income and worker camps related protein supply. impacts, worker camps Indicator: Change in dismantled after household income/protein completion of supply and composition. construction. Financing of civil Planned environmental C A provisions fully All construction sites works, goods, measuresimplemented. enforced by GOL on have been technical assistance, NTPC and its decommissioned and training and study Trained personnel in contractors. restored in tours. NTPC and EMU capable of Indicator: Progress Reports accordance with Adequately staffed implementing NTPC containing information on: provisions o f the and resourced offices and GOL obligations, number of exceptions and/or HCCEMP. inNTPC and respectively. variances; draw downfrom Water quality i s STEMEMU. Code of conduct, HCC- contingency; and. number adequateto ensure Implementation EMMPandSSEP of violations cited against sufficiency and arrangements in place, enforced by NTPC on HCC and sub- contractors. diversity o f fish stock including appropriate contractors and work Knowledge base on the inreservoir, XBF GOL legislation. camps to prevent or populations and status of and NT, and also reduce environmental elephants and other key pose no threat to impacts. species are sufficiently public health. Wildlife management developed to allow Populations o f programs in place for effective monitoring of elephants and other Asian Elephants and population trends and key terrestrial and White wing duck and key threats. aquatic species have surveys completed for Indicator: Five-year stabilized or 17 other species. management plans for all improved on the Separate water quality key species, verijied through plateau. and fish monitoring consultativeprocess with programs inplace. funding securedfor implementation. Water quality in NT reservoir and XBF is within acceptable levels. Indicator: Frequency of dissolved oxygen and nutrients exceeding design A 53 Inputs Outputs IntermediateOutcomes UltimateOutcomes By 2009 by 2015 standards. VatershedManagement Establishment o f WMPA's operational WMPA is able to execute D Conservation and WMPA with core process (FLUPAM, all designated managerial management of the staff inplace, and all PPAMand LDC, and functions in a technically NT2 watershed agencies respect its process framework for sound, transparent and results in no further mandate. resource access professional manner. degradation of Financing o f civil restrictions) are fully Indicators: habitats or declines works, goods, institutionalized. 1.Manual describing inpopulations of technical assistance, Village-based resource program management threatened species. training and extension management plans and practices prepared. Improvedquality o f services. agreements are 2. WMPA staff trained on life for the enclave Implementation developed and management practices. villages, with higher arrangements inplace, endorsed by all enclave incomes, better including supporting villages. 3. Number of staff members access to basic GOL legislation. VCMUsPatrolling fiilly aware of their services and their functions and of those of the Participation of teams established, active involvement in rest of the stafl enclave villages in facilities constructed conservation. SEMFOP activities. and adequately 4. Percent of land area coltered by FLUPAM. Involvement of resourced inall enclave provincial and district villages. a Key wildlife threats such administrations in Biodiversity and land as hunting and further SEMFOP activities. use monitoring systems habitat loss have greatly are inplace. reduced. Tenure system Indicators: recognizing customary 1. Number of encounters land use rights i s in with traps, snares and place. arrests. Training and support 2. Numbers of key wildlife provided to enclave species stable or increased. villages inalternative 0 Most enclave villages livelihoods. implement management agreements for sustainable livelihoods and resource use, usufruct rights have been established and basic education, health and infrastructure services have been provided. Indicator: Number of villageforest and land management agreements implemented. Change in food security. Change in number of children attending school. toring and Evaluation Independent expert a Periodic reporting on Effectiveness of reports in DSRPandPOE panels: DSRP, IAG, dam safety and E&S identifying issues in timely demonstrate abilitv to A 54 Inputs outputs IntermediateOutcomes Ultimate Outcomes By 2009 by 2015 POE. issues and GOL and manner and ensure dam safety and NTPC progress in recommending solutions. accomplishment of meeting dam safety and E&S objectives and E&S commitments C A commitments to under the CA. income targets of IAGreports to Bank resettlers ,watershed management on project preservation, etc. effectiveness in IAGreports on social meeting PDO. and environmental issues and NT2 revenue management, to help ensure progress toward the PDO. Independent Periodic reporting on Effectiveness of reports in Effectivenessof monitoring agencies GOLentities operations identifying issues intimely reports inidentifying for EMU,RMUand and effectiveness. manner and issues intimely Map carry out recommending solutions. manner and independent M&Eon recommending those entities. solutions. 0 Lenders' Technical Reports on all technical Effectivenessof reports in Effectiveness of Advisor. and E&S issues of identifying issues in reports in identifying NTPC's operations and timely manner and issues in timely GOL entities which recommending solutions. manner and identifying issues in recommending timely manner and solutions. recommending solutions. Annual consultative Periodic reporting on Effectiveness of meetings Effectivenessof meetings all project progress and at generating consensus on meetings at constructive review of effective reform measures generating consensus problems and issuesto and corrective actions on effective reform ensure project meets measures and broad development and Consensus amongst corrective actions. project-specific financial parties on project Consensus amongst objectives. progress and corrective financial parties on actions, as needed. project progress and corrective actions, as needed. Financedfrom parallel Mechanism for Eligible programs NT2 revenues initiatives: updating eligible aligned with NGPES applied in financing FMCBC support to programs in line with successors and selection eligible poverty PEMSP, NGPES successors and criteria. reduction and strengthening core selection criteria in Indicator: MOF publishes conservation programs that meet A 55 Inputs , outputs Intermediate Outcomes UltimateOutcomes By 2009 by 2015 public expenditure place. report on implementation of selection criteria, management systems, NT2 revenue management including financial including TA and Financial reporting systems for eligible arrangementsand conducts management training. programs inplace and consultations with NT2 requirements. partners. Indicators: Eligible BSupport to reports published development of (quarterly budget 0 Resource allocations to programs listed in plans service delivery and execution reports; eligible programs can be and budget comply with financial management financial statements; monitored and impact selection criteria; systems for eligible summary of inspection assessed. Budgeted and actual programs, through report; audit report and Indicators: Eligible expenditureson eligible Bank and other management letter). programs ident$ed in programs are greater partners' projects, Public expenditure NGPES successor and key than base expenditures; including TA and performance indicators Continuedpublication of training. reviews and expenditure tracking defined by FY2008; eligible quarterly budget execution reports, DPublic expenditure surveys conducted and programs identified in reviews and public published as scheduled. FY2008 budget and MTEF. financial statements and expenditure tracking Baseline service indicators audit reportsfor eligible surveys. for eligibleprograms programs published. defined. MOF reports on implementation of Eligible programs meet revenue management financial management arrangements and holds standards. annual consultation with Indicators: Application of a NT2 partners. revised Chart of Accounts, permitting identijication of Increased spending eligibleprograms, FY2008; on Eligible programs Publication of quarterly contributes to budget execution reportsfor improvement in eligible programs,financial service delivery statementsand audit reports performance. from FY2008; and Indicator: Progress in publication of summary baseline indicator report on status of eligible definedfor eligible programs and programs. implementation of revenue managementarrangements from six monthsprior to the start of commercial operations. A 56 B. Monitoringand Evaluation Arrangements B.l Monitoring & Evaluation (M&E) Framework 1. The NT2 project i s large and complex, encompassing three distinct geographic areas within the overall project area: the Nakai NamTheun National Protected Area and two corridors linking it to other NPAs (the NT2 Watershed), the Nakai Plateau, and the downstream areas of the Nam Theun and Xe Bang Fai rivers. The monitoring and evaluation (M&E) arrangements for the project seek to ensure that information on physical progress and the impacts and outcomes expected from the project are adequate in scope and detail, accurate, timely and relevant to the needs of the Government of Lao PDR (GOL), project sponsors, financial institutions and other stakeholders involved in the project, so as to ensure that effective arrangements are in place for regular oversight, monitoring and evaluation of project implementation. 2. Given the complexity of the project and its great importance for Lao PDR, several levels of monitoring and supervision have been designed to be carried out by a number of entities. Such entities are both public and private, and are expected to work together harmoniously. Figures 1 and 2 illustrate the M&E Framework and the Institutional Arrangements respectively. The activities to be performed can be sub-divided in four main blocks: (i)Data Collection and Reporting; (ii) Dissemination and Information; (iii) Monitoring and Evaluation; (iv) Informing Stakeholders. The reader i s referred to Figure 1 in which the four blocks are shown as the columns. 3. The rows in Figure 1 represent: (i) Responsibilities; (ii)Reporting Units; (iii)Scope/ Frequency of reporting. The aim of data collection and reporting i s to provide a comprehensive coverage of inputs and outputs, as well as of impacts and outcomes. Such elements are closely interrelated in the Result Measurement Framework. The entities that have primary responsibility for report preparation are NTPC and GOL. NTPC will produce reports through its own three Directorates, the Head Contractor, and the Owner's Engineer. NTPC will produce, every six months, a progress report on the project (including a section on environmental and social aspects) to be made publicly available on the NTPC web-site. NTPC will also provide regular reports to the Lao National Committee on Energy (LNCE) which, in turn, will use the information for the LNCE website (public disclosure). 4. The GOL will produce reports through three entities: Environment Management Unit (EMU),reporting to STEA (Science, Technology andEnvironmental Agency); the Resettlement Management Unit (RMU), reporting to the Resettlement Committee (RC); and the Watershed Management and Protection Agency (WMPA), reporting to the MAF (Ministry of Agriculture and Forestry). The reports will brief the competent GOL ministriedagencies that are members of the National Steering Committee on N T 2 Implementation. The Committee will produce an Annual Project Review, participate in the UNDP Round Table Mechanism, and hold consultations with civil society. A 57 5. The National Steering Committee and LNCE will receive, collate and circulate reports to the Interested Parties on a monthly basis; they will maintain a library, and coordinate project implementation for GOL. Data on project implementation will be made available to the Lenders' Technical Advisor (LTA), on a monthly basis, by NTPC, EMU,RMU, and WMPA. 6. The LTA will monitor engineering and construction management, as well as the environmental and social aspects on behalf of the IFIS andthe private lenders. The scope of work of the LTA also includes the Nakai Plateau and the watershed conservation program. The LTA i s one of the entities that will perform independent monitoring of the activities carried out by NTPC and GOL. The LTA will provide reports of its quarterly site visits to the lenders. For a detailed description of the LTA role see Section B3 below. 7. The other monitoring parties are: (i)the GOL Engineer (GOLE); (ii) Dam Safety the Review Panel (DSRP); (iii) the respective Independent Monitoring Agencies (IMA) to EMU, RMU, and WMPA; and (iv) the Panel of Experts (POE) on environmental and social matters. The functions of these entities are to: (i) verify consistency of programs with agreed principles and objectives (quality control); and (ii) monitor project progress against performance indicators (outcome achievement). The GOLE i s expected to provide quarterly reports to the GOL. The DSRPand the POE will produce annual reports unless they make more frequent site visits. Both the GOL and NTPC have accepted that the advice of the POE and of the DSRP i s going to be binding for them. This is an unprecedented arrangement in Bank-financed projects that further demonstrates the developer's commitment to project quality. 8. The IFIs will avail themselves of an additional independent advising entity: the International Advisory Group (IAG). The IAG i s presently composed of three members who have advised the World Bank President and senior management on social and environmental issues during project preparation and whose mandate i s expected to extend to NT2 revenue management too. The IAGreports will continue to be made public on the World Bank website. 9. Stakeholder information will take place through project websites (NTPC, LNCE, World Bank, ADB), and through annual meetings on project progress. Meetings will be open to civil society, inaddition to the donor community, the lenders, and the developer. B.2 ConsultativeProcess 10. Overall, the key to successful project implementation will reside in the continued commitment of all parties concerned, coupled with frank dialogue when problems are identified. Under the circumstances, engaging all stakeholders (private and public lenders, local and international civil society, the GOL and NTPC) in a regular and transparent consultative process to review project performance i s probably the most effective recourse mechanism to achieve the project's development objective and deliver its potential benefits to the Lao people. 11. With significant IF1involvement, and as the largest private sector investment in Lao PDR, the GOL would be reluctant to act on its NT2-related commitments in ways that would be interpreted negatively by the international investment community. For these reasons, the GOL and NTPC have agreed to engage in a transparent, consultative program to monitor project progress as the centerpiece of the supervision strategy for the Bank-financed project. The Interested Parties are: (1) NTPC's commercial and direct lenders; (2) the World Bank; (3) ADB in its capacity as political risk guarantor; (4) the participating ECAs, and (5) GOL equity lenders and grant providers. A 58 12. Stakeholder consultation will take place through project websites (NTPC, LNCE, World Bank, ADB), and through annual meetings on project progress. Meetings will be open to civil society, in addition to the donor community, the lenders, and the developer (GOUNTPC), using the participation infrastructure developed during project preparation. B.3 Role of the Lenders' Technical Advisor (LTA) 13. The Monitoring and Evaluation (M&E) system has the objective of ensuring that effective arrangements are in place for regular oversight, monitoring and evaluation o f project implementation. Timely identification of problems during the construction and operational phases of the project i s essential for satisfactory M&E. To this effect the InterestedParties have agreed to use the services of an independent adviser (the "Lenders' Technical Adviser" or LTA). The LTA will be a consulting firm providing a single source of advice for all technical aspects related to: a Engineering, a Construction Management, a Environmental, and Social aspects of the NT2 project. 14. The overall M&E system envisaged for NT2 features two levels of independent M&E over and above the internal quality management systems that the entities responsible for implementation (GOL and NTPC) will have in place. The LTA will be involved in the first level. In the same level, independent technical advice to the GOL is provided by the GOL Engineer. The second M&E level will be performed by panels of independent experts (DSRP, POE, and IAG). 15. Engagement of the LTA i s intended to supplement the regular supervision by World Bank and ADB staff and other Interested Parties. It will not affect the continuation of the current practices of the World Bank Group, ADB and the other Interested Parties of consultations with NGOs, both local and international, governmental agencies, members of local and international civil society, and other resources. In conducting its review and monitoring activities, the LTA will act independently and will not represent the views of NTPC, the HCC, the InterestedParties, or any other party involved inthe project. 16. The LTA services will extend over the following periods: (1) construction, which i s 54 months from Financial Close; (2) operations period from the commercial operations date (COD) untilfull repayment of the commercial debt (12 years after COD). B.4 Principles of the M&EFramework2 17. The engineering and contract management aspects of the project are described in the InJanuary 2005, the participating financial institutions met inVientiane and agreedon the principles governing the monitoring and evaluation work that would be carried out on their behalf by a professional engineering firm during the construction and operations periods. They also agreed on the terms of reference (TOR) for this work, which was subsequently agreed with the GOL and NTPC as the basis for a request to the current technical advisor for a proposal that would cover the full range of NTPC's obligations for technical, environmental and social project issues as well as GOLperformance inits areas of responsibility except revenue management. A 59 Head Contractor (HC) Master Plan and associated Sub-Plans. The latter also cover the environmental aspects associated with construction works. Further environmental aspects, as well as social features connected with project implementation are described in several Safeguards Plans. The list of the plans i s shown inAppendix 1. 18. Some of the H C site specific sub-plans (see Appendix l), some o f the safeguards and plans will be developed after financial closure (the Additional Plans). The overall implementation sequence of the activities contained in all plans will be described in the project implementation plan (the PIP) agreed before financial close. The PIP sets out the objectives and broad parameters of each Additional Plan. 19. Before each operating year, NTPC will prepare an annual implementation plan, reflecting the requirements of the operating period obligations under the PIP. Each Annual Implementation Plan will incorporate the requirements of the Additional Plans applicable to that period. 20. Based on the provisions contained in the above listed plans, NTPC will produce, for the Interested Parties' benefit, periodic reports associated with the implementation of those plans. The LTA will review all reports and information provided by NTPC and comment and advise on these reports for the InterestedParties' benefit. The LTA will produce a consolidated report every quarter, for the InterestedParties' consideration. In addition, the LTA will include in each of its periodic report its commentary on GOL's Watershed Management Obligations. 21. The LTA will monitor activities related to watershed management on the basis of reports that the GOL will make available. 22. The LTA will provide its services by means of two independent teams: (i)EngineeringandConstructionManagement (E&C) team, dealingwiththe engineering and contractual aspects of the construction works; (ii)Environmental and Social (E&S) team dealing with E&S aspects of the project. 23. B y operating within the framework of the LTA's quality management system, the two teams will independently report to the LTA's Project Manager. The latter will be the primary coordinator and single point of responsibility for the LTA role and will be responsible for the delivery of the outcomes of the LTA. He/ she will coordinate the input of the two teams as necessary in all correspondence with the Intercreditor Agent and with the Interested Parties. The LTA Project Manager will also ensure adequate coordination with the GOL Engineer in order to minimize duplication of activities. 24. The Interested Parties assign high importance to the monitoring and evaluation function of the LTA and therefore consider it critical that the LTA should have the opportunity to get independent sources of validation of the progress reports that will provided by NTPC and b y the GOL (for the watershed). To this effect an intense site visit schedule has been foreseen. Quarterly visits are foreseen during the construction period, and the first year of operation, for both the E&C and the E&S team. The E&S team will make visits every 4 months during operation years 2 and 3, and semi-annual visits in years 4 and 5. Following the first operation year, the E&C team will make semi-annual visits until operation year 5. Thereafter, until final maturity of the NTPC loans (operation year 12), scheduled visits will be conducted annually. The site visit plan i s outlined inthe following diagram. A 60 LTA Site Activity (Field Visits) I Constructionperiod Operationperiod year CI c 2 c3 c 4 c 5 01 0 2 03 04 05 06 07 08 09 010 011 012 Project Management -1 -1 Engineering& Construction Management 4 visits/ veal I E l l v r w v e x . . II p Environmental& Social 4 visits/ year 1 D-11 2 vis/ yearI 1 visit/ vear 25. Ifrequiredbyparticularcircumstances,additionalvisitsmaytakeplaceatsuchother times as the Interested Parties may request. The Lenders' Technical Adviser may have access to the site at such other times as the Interested Parties may request, and will have access to the site under exceptional circumstances where access i s required. 26. The LTA will provide project completion certification to the InterestedParties. The LTA Project Manager will coordinate this task between the E&C and the E&S teams. The LTA teams will: e Review all work requiring completion and defects needing correction, and monitor the completion of all outstanding work under the project documents and financing documents as per the specifications; e Confirm when the project has achieved Commercial Operation Date and substantial completion (as such of each terms are defined in the Head Contractor Contract - HCC); e Certify that the project has been constructed and i s being developed, operated and maintainedin accordance with the relevant project commitments; and e Without limitations to the general review of NTPC, provide a certificate verifying that the project i s incompliance in all material respects with the PIP, the Concession Agreement, applicable lender's policies and guideline^,^ national legislation as relevant and any other requirement as detailed inthe financing documents. 27. Reporting by the LTA will include the following: e Quarterly Reports; e Monthly drawdown certification (as required under the CTA); e Site visit reports, if not included in quarterly reports; e DSRP, POE, and IAGreporting reviews, if not included inquarterly reports; e Reports on specific issues (e.g. non compliance claims); e Certification of activities/ section of works; e Certification of plan changes or new plans being provided; e Recommendations to InterestedParties on voting matters with technical impacts; and e Certification of activities/ sections of the works. 28. The LTA will provide experienced staff for M&E site visits. In addition to that the LTA will have regional staff ensuring more or less continuous presence in Lao PDR. Head office EquatorPrinciplesand applicableWorld Bank, ADB, and COFACE guidelines. A 61 back-upfor specializedtasks i s also foreseen. Staff expertise will be carefully suitedto the needs of the different implementationperiods. Expertise requiredi s expected to include the following: Civil Engineer; Financial/ Contract Specialist; Environmental Specialist; Socio- economic/ Socio-cultural Specialist; Electro-Mechanical Engineer; Water & Sanitation Specialist; Health Specialist; Biodiversity, Forestry, Park Management Specialist; Wildlife Specialist; Rural Livelihood Specialist; Accountant; and other specialists. 29. The LTA will provide satellite imagery interpretation expertise for the M&E of the watershed management activities. 30. NTPC will produce, every six months, a progress report on the project (including a section on environmental and social aspects) to be made publicly available. Before its publication, the LTA will review each report and circulate it, along with its recommendations, to all Interested Parties. After incorporation of the modifications/ additions that the Interested Parties may deem necessary (to be agreed with NTPC), the reports will be made publicly available on the NT2 web-site. Publication of progress reports, along with POE's and IAG's reports will be part of the disclosure task and will facilitate periodic consultation with local and international stakeholders. B.5 GOL RoleandResponsibilities 31. This section describes the Government's obligations and commitments with regard to the M&Eframework that have been agreed between the GOL, NTPC and the international financial institutions acting as lenders andor guarantors to the project. The Government's commitments with regard to the M&E framework are set forth in Attachment 3 of the Government's Letter of Implementation Policy, dated March 7, 2005 (see Annex 1). Figure 2 lays out the overall M&E framework and shows graphically the roles and responsibilities of the GOL and other parties. 32. Under the project agreements, the GOL has the sole responsibility for management and protection of the NT2 watershed, as described in the SEMFOP document, and shares responsibility for some of the resettlement activities on the Nakai Plateau and for some of the social and environmental impacts in the downstream areas with NTPC. It also has a national responsibility to ensure that the terms of the Concession Agreement between it and NTPC are honored in full and that there are no material impacts on its citizens, the environment or the economy in the project area that are caused by the project and left unmitigated. The presence of GOL in NTPC's board ensures also the developer's commitment to such intents. Finally, the GOL is concerned to maintain a high degree of interest and involvement of the international financial and development institutions and civil society inprogress on the N T 2 project and, more generally, inthe development of Lao PDR. 33. Accordingly, the GOL acknowledges the following responsibilities which fall to it under the M&Eframework and intends to take the following actions to meet these responsibilities: (i) Ensure the accurate collection and analysis of data and information by govemment bodies involved in project implementation. These bodies include the Environment Management Unit (EMU), the Resettlement Management Unit (RMU) and the Watershed Management and Protection Authority (WMPA) under the respective authority of the Science, Technology and Environment Agency (STEA), the A 62 Resettlement Committee (RC) and the Ministry of Agriculture and Forestry (MAF).To do so, the GOL will ensure that these implementing bodies are staffed with qualified professionals and that the scope and frequency of the data to be collected and the reporting formats for each of these bodies will be agreed with the lenders prior to project effectiveness, GOL will also grant external M&E bodies full access to the project sites and other affected areas. (ii)Ensure the prompt dissemination of that information in theform of periodic progress reports of agreed scope, detail and format to the independent monitoring agencies (IMAs) which are charged with monitoring and evaluating the performance of these bodies, expert advisors to the Government, including the Government's Engineer (GOLE), the Dam Safety Review Panel (DSRP), the Panel of Experts (POE), and to the Government bodies involved in direct project oversight: the Lao National Committee on Energy (LNCE) and the National Steering Committee on NT2 Implementation (SC). These reports would cover physical progress, environmental and social aspects of the project, revenue management arrangements and progress under the public expenditure management strengthening program (PEMSP), whether produced b y project implementing agencies or by the expert advisory bodies and the IMAs. The scope, frequency and reporting formats for each of these bodies will be agreed with the lenders prior to project effectiveness. (iii)periodic Ensure the prompt dissemination of all information on project progress, in theform of progress reports of agreed scope, detail and format, to the participating financial institutions and their advisor, the Lenders' Technical Advisor (LTA). The LTA will receive information on project progress directly from NTPC and from all government implementing agencies through the Secretariat of the LNCE as these reports become available. These reports would cover physical progress, environmental and social aspects of the project, revenue management arrangements and progress under the public expenditure management strengthening program (PEMSP), whether produced b y project implementing agencies or by the expert advisory bodies and the IMAs. The scope, frequency and reporting formats for each of these bodies will be agreed with the Lenders prior to project effectiveness. The information from Government agencies to the LTA will be for the use of the IFISand bilateral agencies and will not be made available to the private lenders. The Government understands that adequate provisions will be put in place by the LTA to ensure confidentiality of this information and would expect that a suitable confidentiality undertaking would be entered into for this purpose with the Government. Reporting on revenue management issues will be directed to the I F I s and interested bilateral agencies only. (iv) Facilitate the timely work of the expert bodies established to advise the Govemment (these include the DSRP, GOLE, and POE), as well as the MAS,being financed by NTPC under the CA, to monitor and evaluate the performance o f government implementing agencies (EMU, RMU and WMPA). To do so, the Government will ensure that the expert bodies and the IMAs remain in place, legally empowered, with adequate resources and full access to the information necessary and to the project area so that they can carry out their respective responsibilities during the project period. They will receive copies of periodic reports in their areas of responsibility electronically and as soon as they are published. A 63 Facilitate periodic supervision by the individual financial institutions participating in the project and their advisors, in particular the LTA and the lntemational Advisory Group (IAG), providing themfull information from Govemment and non-govemment sources, and enabling them access to the full project area. The Government will continue to provide full support to the supervision activities of the IFIs, the private financial institutions and their advisors. It understands that the lenders will seek to coordinate their supervision activities so as to minimize the number of requests for information or site visits and to utilize information available to project implementing agencies where available. Facilitate the work of the intemational financial institutions to assist the GOL to lay the foundations for robust NT2 revenue management arrangements through periodic supervision missions by their staff and advisors, andthe carrying out of periodic public expenditure reviews and public expenditure tracking surveys, as set forth in the technical annex on revenue management (Attachment 1of the GLIP). Coordinate the Govemment's involvement in and oversight of the project to ensure efficient coordination of all governmental agencies involved in the NT2 project, prompt action on the part of these agencies to meet the government's commitments under the project agreements, and act as liaison to the financial institutions participating in the project, as well as local, regional and international stakeholders. To carry out these functions, the Government has established two bodies to oversee implementation of the NT2 project (see Figure 2 above). The Lao National Committee on Energy (LNCE) i s responsible for ensuring that NTPC and the Government meet their respective responsibilities under the CA. Through its Secretariat, it will coordinate Government oversight of implementation of the NT2 project, receive reports from project implementation entities and expert advisory bodies and disseminate information to lenders and, through its website, to the public. The Chairman of the LNCE i s the Deputy Prime Minister. The Lao Holding State Enterprise has been established as a new state-owned enterprise, wholly owned by the Ministry of Finance, to hold the Government's shares in NTPC. It will build a specialist staff with the necessary technical skills sufficient to act as shareholder. The Government has a third entity, which i s the National Steering Committee on N T 2 Implementation. It brings together all concerned government departments involved in the NT2 project to ensure smooth, cross- ministerial cooperation and coordination between agencies o f the central government and the provincial and local governments involved in the project. The Secretariat of the LNCE will assume the responsibility to coordinate the inputs of all concerned government agencies and to follow up to ensure that the Committee's decisions are implemented efficiently. (viii) Join with the participating financial institutions in annual consultations to review progress on technical, environmental, social and other project-related matters, including thepublic expenditure management strengthening program and NT2 revenue management arrangements, as well as an in-depth review of all aspects of the project six months prior to the commercial operations date (COD). The Government intends to entrust this responsibility to the LNCE, which will act as the Government's international representative on the project. The Government plans to take the lead in calling for and chairing an annual consultative review o f project progress, bringing A 64 together the GOL, NTPC and the participating financial institutions, with the support of the I F I s involved inthe project. (ix) Znform interested stakeholders, including civil society, about project developments through the UNDP Round Table Process, or alternative mechanisms, and an updated Lao Government project website and other measures. The LNCE will represent the Government in the UNDP Round Table Process, which brings together development organizations beyond the scope of the NT2 project. Finally, it plans to maintain a periodic dialogue with civil society on the project. The LNCE will update its current project website to post periodic reports on project progress, including the reports of the expert advisory bodies (DSRP, GOLE and POE) andthe IMAs. 34. The GOL expects to be able to continue to draw freely on the advice and support of the participating financial institutions, and in particular the support of the IFIs, to build its institutional capacity for the purposes described above, to ensure that the progress reports are complete, objective and timely, and to maintain a constructive dialogue with all project stakeholders and civil society. B.6 Costs andFunding 35. The Terms of Reference for the LTA services have been finalized and agreed with all parties involved (GOL, NTPC, IFIs, and the lenders). Following agreement on a set of principles for the governance of the environmental and social requirements for the project, the details of the LTA scope of work and TORS were agreed upon in January, 2005. After clarifications and revisions, a proposal from PB Power, which has performed the LTA role satisfactorily prior to financial closure, was agreed upon by the InterestedParties. 36. The cost of the monitoring and evaluation activities to be carried out by the LTA will be covered b y NTPC. This excludes activities related to watershed management that will be financed b y the IFIs and possibly AFD and COFACE.4 B.7 BankStaffSupervision 37. Supervision by Bank staff will be particularly intense during the construction period and the first two years after the start of commercial operations, in order to closely monitor project activities and to support institutional building amongst Lao government implementing agencies in these two fields. Given the relevance of social and environmental aspects, two Bank staff members would be based inThailand andor Lao - one social and one biodiversity specialist - to be close to the NT2 project and to supervise activities on other projects in the region. Other staff would oversee project implementation in connection with periodic travel inthe region. 38. Adequate allowance has been made for the cost of Bank staff supervision during the five year period (FY 2006 - FY 2010). The allowance also covers the cost of the IAG and revenue managementactivities at during the period. In addition, the IFIs would need to cover the cost of independent monitoring and evaluation of the watershed, as an adjunct to the proposed comprehensive M&E contract with PB Power (PBP). NTPC will cover the cost o f this contract Compagnie Franpise d'Assurancepour le Commerce ExtCrieur (COFACE) is an insurance company that provides export credit andlong-terminvestment insurance on behalfof the Govemmentof France. A 65 for all activities involving sole NTPC or joint NTPC-GOL responsibility, but not of the watershed or revenue management which are sole GOL responsibilities. 39. Missions would be carried out jointly with ADB and. AFD, in order to share responsibility for social issues and revenue management, continuing the collaborative approach adopted during project preparation. COFACE may join occasional E&S missions as the opportunity allows. This could result in some incremental cost saving from the projected cost. These three institutions have been asked to share the cost of oversight for revenue management and the NT2 watershed. Inprinciple, they are willing to do so, but there i s some doubt that they will have sufficient budget to share the cost of consulting services for this purpose. A 66 jl * * MC * * I 63uanbaqpdo3SI .. I Attachment 1 to Annex 5 NTPCPlans NT2Monitoring & Evaluation H C and NTPCReporting - TR 1 H C Master Plan HC available 2 H C Sub-plans (topics) HC SP1 Erosion and Sediment Control H C available SP2 Spoil Disposal Planning and Management HC available SP3 Quary Management HC available SP4 sP5 Water Quality Monitoring HC available Chemical Waste/ Spillage Management H C available SP6 Emergency Planfor Hazardous Materials H C avai1ab1e SP7 Emissions and Dust Control HC available SP8 Noise Control H C avai1ab1e SP9 Physical Cultural Resources H C available SPlO Landscaping and Re-vegetation HC available S P l l Vegetations Clearing HC available SP12 WasteManagement H C available SP13 Reservoir Impoundment Management H C available SP14 Environmental Trainingfor Construction Workers H C available SP15 On-site Traffic and Access Management H C available SP16 Explosive Ordnance Survey and Disposal HC available SP17 Construction Work Camps H C available SP18 Manual of Best Practices in Site management of HC available Environmental Matters SP19 Project Staff Health Program. HC available 3 H C Site Specific Sub-plans H C * *There will be about 57 site specific sub-plans. They will be developed at pacewith construction progress. The following list shows the plans currently (20January 2005) available. SSPl CW2-40-00: Main Construction Work Camp HC available SSP2 CW2-33-00, CW2-34-00 6 CW2-34-02: Access Tunnel HC available Portal Excavation SSP3 CW2-20B-00: Nakai Construction Work Camp H C available SSP4 CW1-37/51/56/57-00: Upgrade Roadfrom Thakek to H C avai1ab1e Power House SSP5 CW1-36-00: Residence Nam Theun HC available SSP6 CW1-O1B 6 CW1-03: Phu Phako Quary Access Road HC available SSP7 CW1-01-OOA:Phu Phako Quarry Main Area HC available SSP8 CW1-05-00: Dam Site Construction Work Camp HC available SSP9 CW2-33-00: Power House, Switchyard, Tailrace Channel HC available E2 Reservoir and fishery population NTPC after FC E3 Adaptive Management of RiparianRelease NTPC after FC E4 Fish studies (monitoring) inthe N T NTPC after FC E5 Studies o n stream morphology of NT NTPC after FC E6 Animal Rescue Plan NTPC after FC E7 Wildlife Management and Protection Program NTPC after FC A 69 E8 White-winged duck Conservation Program NTPC after FC E9 Elephant Management Plan NTPC after FC E10 EMUTechnical Assistance Program NTPC after FC ensatory Forestry Program NTPC after FC E13 Watershed Management and ProtectionAuthority GOL after FC EMUCapacity Building & Operational Budget SOCIALSAFEGUARDS s1 Nakai Plateau RAP NTPC/ GOL after FC s2 Detailed Compensation Planfor D/SAreas NTPC/ GOL after FC (includingXBF) 53 Project Lands RAP NTPC/ GOL after FC s4 Village development plan NTPC/ GOL after FC s5 Public HealthAction Plan (4 sub-plans) NTPC/ GOL after FC A 70 Annex 6: Detailed Project Description L A O PEOPLE'S DEMOCRATIC REPUBLIC NamTheun 2 Hydroelectric Project and NamTheun 2 Social andEnvironmentProject A. Technical Description - Hydropower Component' Background Project Location and Layout 1. The Nam Theun 2 Hydroelectric Project would be built on the Nam Theun River, a tributary of the Mekong River, in the Bolikhamsay province in central Lao PDR. The 4,013 sq kmcatchment area for the project is in the Annamite Mountains along the border with Vietnam. It is an inter-basin river diversion project which would divert the waters of the NamTheun River into the Xe Bang Fai River,2 a tributary of the Mekong River which joins it about 150 km south of the Nam Theun River. Key features of the project include a 48 m high, 320 m long concrete gravity dam with an integrated spillway on the Nam Theun River that would create a 450 sq km reservoir on the Nakai Plateau. Water from the reservoir would drop more than 350 m to an above-ground power house located at the base of the Nakai Plateau. The powerhouse would have an installed capacity of 1,070 MW. The water discharged from the powerhouse would be led to a regulating reservoir from where it would flow to the Xe Bang Fai River via a 27 km purpose- built open channel andthe reconfiguredbedof the NamPhitRiver. 2. Most of the components of the project - including the dam, reservoir and power station - are in Bolikhamsay and Khammouane provinces, with the transmission line passing through the Savannakhet and Khammouane provinces. The project area would cover approximately 40 percent of the Nakai Plateau with about 90 percent of its watershed being formed by the Nakai Nam Theun National Protected Area. It i s estimated that 85-90 percent o f the total watershed i s currently covered by forest, whereas the reservoir area, because its ease of access has allowed extensive logging for many years, i s about 33 percent forested. The mountains which form the vast majority of the watershed are heavily forested and innear pristine condition. Hydropower Components 3. The hydropower component consists of the following main elements (see Attachment 1 for the technical parameters of each element): Dam. The reservoir would be formed by a concrete gravity dam of height of 48 m (deepest foundation to crest) and crest length 320 m at an elevation o f 540.4 meters above sea level (MASL). The dam location has been selected after several studies of alternative locations and the dam design arrived at after considering several options for technical suitability and cost. The dam axis would be located at a sandstone outcrop in a horse-shoe ' This annex also covers the project hydrology and geology in sectionsB and C, respectively. Intheprovincesof KhammouaneandSavannakhet. A 71 shaped bend in the river at Keng None. The dam foundation would be grouted for seepage control and a drainage curtain provided. 0 Spillway. A gated spillway would be constructed integrally with the dam. The spillway would have four radial gates with a flap added at the top of two of the gates to allow for discharge of small floods inpreferenceto opening a large gate. The spillway chute would terminate in a hydraulic jump-stilling basin. The 5,000 year return period flood, with an inflow peak of 8,360 cubic meters per second(outflow 7,240 cumecs), can be discharged with the reservoir at its maximum flood level. The spillway and stilling basin would be capable of discharging the Probable Maximum Flood (PMF) without over-topping or endangering the main and saddle dams. 0 Riparian Flow Outlet. An outlet conduit would be provided next to the spillway for the downstream riparian release. The riparian flow of 2.0 cumecs would be taken from a multi-level intake. A micro-hydro unit utilizing the riparian flow, backed up by a diesel generator would be provided for operation of the spillway gates. 0 Reservoir and Saddle Dams. At full supply level (FSL) at an elevation of 538.0 m, the reservoir would have an area of 450 sq km and would hold 3,910 million cubic meters of water. Operating level would be set at an elevation of 525.5 m. Six earth embankment dams would be constructed along the escarpment side of the.reservoir rim to create storage to FSL. The saddle dams are of earth-fill design which i s an economic alternative suitedto the site conditions. The approachusedfor the design of the saddle dams features a freeboard of 4.25 m above FSL elevation. of 538 m. In addition, the concept of "sacrificial fill" has been used to create a large section of embankment upstream of the core (generally in excess of 50 m) which can be considered to fail "sacrificially" in the event of an unusually high seismic event, without impactingthe core and filter drains. 0 Headrace Channel and Intake Structures. A headrace channel 50 m wide and 14 m deep would be excavated in the reservoir floor to convey the reservoir waters to the intake. Its design has been optimized. The intake would be a concrete structure with four openings and provided with mechanized trash racks. From the intake portal water would be led to two gates (i) the downstream gate, a fixed wheel service gate; and (ii) upstream guard the gate for emergencies and maintenance work. The aforementioned gates would serve to isolate the headrace tunnel from the reservoir, allowing for dewatering and inspection of the tunnel and surge shaft. Headrace Tunnel, Surge Shaj?, Pressure Shaj? and Pressure Tunnel. This system would convey water from the intake channel to the powerhouse. The underground conduits would be throughout concrete lined. In sections where the surrounding rock cannot contain internal pressure the conduits would be steel lined (approx. 500 m). A concrete linedsurge shaft 9 mdiameter and 250 mhigh would serve to limit pressure transients in the tunnel. The design i s based on peak surge arising when the full plant output is suddenly thrown off. 0 Power Station and Switchyard. The power station would be a single over-ground building having a machine hall of 154 m by 22 m. This design was adopted after considering alternative of underground PH which was found to be riskier from the viewpoint of construction schedule. The building would house: (i) four @ 252 MW capacity vertical A 72 shaft Francis turbines (the design and capacity has been optimized after considering several sizes and EGAT system dispatch needs); and (ii) two @ 40 MW vertical shaft Pelton turbine-generator units. The output of the 4 Francis units would be earmarked exclusively for EGAT. It would be steppedup to 500 kV from the generator voltage level by 5 @ 300 MVA three-phase transformers and connected to an outdoor 500 kV switchyard by overhead lines. The output of the Peltons would serve EDL. It would be stepped up to 115 kV from the generator voltage level by 2 @ 50 MVA 3-phase transformers and connected to an outdoor 115 kV switchyard by underground cables. A SCADA systemwould be installed to monitor, supervise and control vital elements of the Powerhouse. Relevant parameters would be transmitted to EGAT's National and Regional Control Centers and to NTPC's office in Vientiane. The power plant would be designed for full automatic operation. 0 Transmission Lines. Electricity for EGAT would be delivered over a 500 kV, 138 km long double circuit transmission line to the transfer point on the Lao-Thailand border. From the transfer point EGAT would take ownership and convey power over an identical 500 kV line to its Roi Et substation. Metering facilities would be provided with adequate back up. Electricity for EDL would be transmitted over a 115 kV, 70 km long transmission line to the Thakek substation. EDL would also take about 15 MW of power at 22 kV from the power house switchyard. 0 Tail Race Channel and Regulating Weir. The water discharged from the turbines would be led by a tailrace channel to the regulating pond. The pond would be created by a regulating dam consisting of two contiguous concrete structures one spilling into the continuation of the Nam Kathang River and the other into the downstream channel. An earth-fill dyke would complete the downstream closure of the Regulating Pond. The regulating dam would have apondcapacity of 5.7 million cubic meters (m3)-enough to spill flows in excess of the maximum turbine discharge into the Nam Kathang. Features of the dam design comprise a combination of roller compacted concrete and earthfill dams. Provision would be made at the weir for aeration of water. A short length of irrigation channel would be constructed to supply 5 cumecs of water for irrigation purposes. 0 Downstream Channel. An excavated channel of varying widths (1.8 m to 8.5 m) would lead water from the regulating dam to the Xe Bang Fai River, 27 km away. The channel would be concrete lined, to safeguard against erosion of the side walls over time. The normal water level in the channel would be higher than the surrounding ground level, which would permit gravity irrigation. Unlined sections of the channel would be cut into the landscape so that drainage waters can reach the channel and be transported along it. An inverted siphon would take the channel under the Nam Gnom River. Thereafter the channel would enter a short tunnel section and then follow the alignment of the Nam Phit River. A drop structure would be provided in the channel for velocity control and aeration of the water. Bridges would be provided along the channel route for access across the channel. 0 Roads and Bridges. The following roads and bridges would be constructed upgraded under the project: (i) to Gnommalath - The existing alignments of roads 12 and Thakek 8B would be upgraded to provide safe two lane traffic flow; (ii) Gnommalath to Nakai - A 73 The existing alignment would be significantly upgraded for stable and safe all-season use; (iii)Nakai road to Ban Nam Nian. A new road would be constructed to replace the section o f road 8B that would be submerged by the reservoir. The route would follow the southern rim of the plateau to ban Thalang and cross the Nam Theun at that site over a bridge to be constructed. The new road wouldjoin existing road 8B at Ban NamNian and continue to the dam site access road; (iv) dam site access road - access to dam site would be provided by a new road starting from road 8B near the village of Ban Phone Keo; (v) dam site to quarry - The section of road 8B would be upgraded; and (vi) resettlement site roads - new access roads would be built from the Nakai district to the resettlement community south east of Nakai. 0 Operators Village. A village would be established for operating staff and families near the regulating dam and provided with the following facilities: (i) about 48 lodgings for permanent staff; (ii) a guesthouse for temporary personnel and visitors; (iii) maintenance services including water treatment plant, sewage treatment plant, fire fighting units, emergency power supply, garbage collection facilities helipad, guards and fencing (iv) recreation and leisure facilities such as playground swimming pool, tennis court, auditorium and library; (v) health services with a dispensary; (vi) school and temple. Construction Materials 4. The availability and suitability of materials for project construction i s indicated below: 0 Sand Deposits. Two sand deposits have been identified - one upstream and one downstream of the Nakai Dam - with a combined volume of exploitable sands for concrete aggregates estimated to be approximately 60,000 m3.Test results indicate that the sand deposits are suitable for concrete. 0 Sandstone and Limestone Deposits. A number of suitable limestone sources have been identified for the project: (i) the Permo-Carboniferous karstic limestone found at the Phou Phako Quarry (approximately 17 km north-east of the Nakai Dam site) for the Nakai Dam; and (ii)limestone found at the Ban Pha Thoung Quarry (approximately 10 km south of Gnommalath) for the power station, regulating dam and general uses. Project Construction 5. NTPC will enter into the Head Construction Contract (HCC) with EDF, the Head Contractor (HC), who will undertake the construction of the project. The HCC i s a date certain, fixed price, turnkey engineering, procurement and construction contract between NTPC and EDF.The HC inturn will enter into subcontracts for the construction works under five principal subcontracts: three for civil works (CW 1, CW2 and CW3) and two electromechanical (EM1and EM2). The subcontractors for all these packages have been selected and the contracts finalized. Project Operation and Maintenance 6. The role of Operation and Maintenance of the Hydropower Plant would be assumed by NTPC itself, utilizing the services of EDF and ESCO (a subsidiary of EGCO) staff, and recruiting local staff to fillappropriate positions. Both EDF and EGCO have significant power plant operating experience. EDFare a major operator of hydropower in France, while EGCO i s a A 74 major power generation company in Thailand with over 25,000 MW of plant. Both companies have capacity to provide management and engineering services capable of meeting the requirements o f the Nam Theun plant. 7. Staff o f EDF and ESCO would be engaged through: (i) Technical Service Agreements: (ii)Management Service Agreement; and (iii) Personnel Service Agreement, which spell out comprehensive contractual arrangements between the parties. 8. The proposed organization would comprise the Chief Executive Officer of NTPC, managing five divisions - Operation and Maintenance; Technical Construction; Social and Environmental; Administration and Human Resources; and Finance. 9. The staffing of the organization would be as follows: Core Activities Expatriates from EDF 4 Training Coordinator from EDF 1(duringpre-operationonly) Expatriates from ESCO 3 Local/Asia Market 18 Local - 46 Total 72 Non-Core Activities (Site Facilities) Local/Asia Market 1 Local - 72 Total 73 10. The eight expatriates employed at start would be reduced to four over a period of seven years of operation, with local staff taking over more responsibilities. Staff recruitment would commence in 2006, initially undertaking training and then being employed around September 2008, when operation activities would commence. 11. In addition to the permanent staff, a number of technically specialized services would be sub-contracted, in particular - SCADA maintenance and support; communications; transmission line and substation maintenance. An assessment of regional subcontractors i s under way. 12. Table 1 below provides a break down of the estimate of 0 & M expenditure over 12 years, which amounts on an average to a low number of about 0.11 C/kWh (typical of hydro power plants), based on an annual energy generation of 5,462 GWh. A 75 Table 1: Operations and Maintenance Cost (US$ Million) Construction Schedule 13. A construction bar chart for major project activities i s presented in Attachment 1. The schedule i s subject to lenders' review and approval. Key Events: Dates 14. A summary of the key events and their scheduled dates i s presented below: a Notice to proceed May 2005 a Wet seasons June to November each year a Nakai Dam o Diversion tunnel Dec 04 - May 05 o Cofferdam +excavation Nov 05 - May 06 o Abutments, Stilling basin & RCC Oct 06 - May 07 o Spillway, Piers, Gates 1and 2 Nov 07 - Apr 08 o Start impounding May 08 o Gates 3,4 and 5 April 08 - Jan 09 a Intake channel and structure Nov 05 - May 08 a Headrace tunnel excavation Nov 05 - Dec 06 a Headrace tunnel lining and completion Dec 06 - Apr 08 a Surge shaft and tunnel excavation Jun 05 - May 06 a Surge shaft and tunnel lining and completion May 06 - Mar 07 a Pressure tunnel excavation Oct 05 - Sep 06 a Pressure tunnel liningand completion Sep 06 - Apr 08 a Pressure shaft excavation Aug 05 - Feb 07 a Pressure shaft lining and completion Mar 07 - Apr 08 a First filling of tunnel May 08 a Pelton machines on line Dec 08 - Feb 09 a Francis machines on line Feb 09 - JulO9 a Scheduled COD Nov 09 A 76 Main Observations 15. The following are the main issues and observations (abstracted from the Lenders' Engineer Report, dated January 14,2005): Reservoirand Dams 0 As in all dam construction activities, river diversion represents a critical activity. More program flexibility could be achieved if the diversion tunnel could allow closure during the wet season. 0 Failure to achieve construction milestones in advance of wet seasons, or to carry out construction programmedin wet seasons, could push activities back b y six months to the following dry season. 0 Failure to hit the May 08 impounding milestone could delay impounding to May/Jun 09. As the reservoir needs to be at least partially filled to commission the intake tunnel, and thenthe units,this couldcause delays to COD. Power Tunnel System 16. The following are the reasonable "probable" expectations of delays intunnel works: 0 Realistic potential delay: three months (general slippage); 0 Possible delay: six months (unforeseen events with substantial consequences); and 0 Extreme delay: 12 months (major unforeseen conditions). 17. An extreme 12months delay intunnel completion or inthe completion of the dam (which are parallel activities) would result in only a seven month delay in meeting the COD and payment of four months liquidated damages to EGAT, which are not large. JAICA has estimated that the chances of this 12month delay occurring are one in a thousand. Downstream Channel 18. A major risk to the completion schedule is currently attributed to the downstream (D/S) channel, as the design (and flow analysis) has not yet been done in detail. The main concern i s regarding geological uncertainties for the 9 m diameter, 700 m long tunnel which forms part of the downstream channel. 19. As a measure of precaution, preliminary work on this channel has been advanced by one year (see PCA below). Preliminary ConstructionActivities (PCA) 20. As the main subcontracts have yet to be finalized, although letters of award have been issued, Preliminary Construction Activities Agreements (PCCA) have been signed with all the contractors, totaling US$34.6 million. These PCCAs cover activities - such as surveys, designs, UXO clearance, excavation, construction of temporary infrastructure (access roads, camps, etc.) - to ensure timely completion of critical elements o f the project. A 77 B. Project Hydrology and Geology B.l Hydrology Hydrological Regime 21. The Nam Theun River rises in the Annamite Mountains in eastern Lao PDR at an elevation 2,286 MASL and flows south through the mountains to the Nakai Plateau at an elevation of approximately 525 MASL. During its descent the Nam Theun River i s joined by three major river systems flowing generally west-south-west in deep V-shaped valleys. 22. The project is requiredto maintain aminimumriparian releaseinto the NamTheunRiver of 2.0 m3/second(as measuredon a weekly basis) and complementary releases up to amaximum of 5 million m3in any period of 12 consecutive months to safeguard the downstream ecology. This amount represents an annual flow of about 68 million m3(or 0.9 percent of annual average flows). During periods of excessive water flow into the reservoir, and to the extent that such water i s not used for generation and cannot be stored, downstream spillage would occur. Based on historic records, it i s anticipated that such spillage will occur approximately every third year. All other flows will be led by the headrace channel/headrace and power tunnels to the Power Station, then via the tailrace channel, regulating pond and downstream channel to the XBF River. Water quality in the Nam Theun River i s good with near neutral pH, high dissolved oxygen levels, low conductivity and nutrients and low pollution levels. 23. The XBF River has a catchment area of 9,500 km2commencing at the spine of the Louang Chain Mountains on the border with Vietnam. The upper catchment i s heavily forested with dense undergrowth in gullies and ravines whereas downstream the river flows through the XBF plains (bounded by the Mekong River to the west and by upland forest to the east). The project will release water into the XBF River in the XBF plains. The water flow in the XBF at Mahaxai, the nearest settlement to where the downstream channel joins the river, averages 7,290 million m3per year. High flows leading to flooding occur in the XBF at 2,270 m3per second for a slightly longer than two-year returnperiod flood with 3,000 m3per second on a 50-year return period. 24. Hydrological Records, Water Flows, Generation Potential. Project hydrological studies and investigations have been updated and consolidated in the latest study by SMEC - January 2004. 25. Hydrological records for the Nam Theun River have been established since 1950. However, direct flow measurement commenced only in 1986, while flows in previous years are based on regression analysis using hydrological records from the Nam Ngum Reservoir, located north of Vientiane. The GOLISponsors have monitored water flows at the site and monitoring will continue throughout the construction and operating periods. Records (see Table 2 below) show that the average discharge at the dam site i s 237 m3/sec. and the lowest discharge 19.2 m3/sec. A 78 Table 2: Historic Flow Records Source: Project Information Memorandum, NTPC April 2003 26. The annual inflows have varied historically, on average, by approximately 20 percent from the long-term average of 7,526 million m3.The latter is almost double the capacity of the reservoir, so that in an average year, the reservoir should be fully replenished even after operating the plant at full capacity during the dry season. The minimumwater flow recorded was 3,776 million m3in 1998 (or 50 percent of the annual average) and the maximum water flow was 12,070 million m3in 1981 (or 160 percent of the annual average recorded in 1981. Despite the relatively large annual fluctuations, average water flows on a medium term basis (i.e. every decade) are very stable (see Table 3 below). A 79 Source: Project Information Memorandum, NTPCApril 2003 27. The year 1998 was impacted severely by an El Niiio that brought droughts over much of Southeast Asia. The Nam Theun River flow of 3,776 million m3 was just over 50 percent of its annual average. As, the reservoir's probable maximum capacity i s 3,910 million m3, at the proposed FSL o f 538 MASL, amounting to an annual mean energy of 5,700 GWh), 1998 would have been the only year since 1950 when the flow would not have been sufficient to fill the reservoir from empty. However, as the reservoir will not be fully emptied during operations but will always retain a minimumwater level, even in 1998 the reservoir's probable maximumactive storage of 3,530 million m3could have been filled by the water inflows, depending on generation requirements. Due to the regulation by the reservoir, the energy generated by the power station will therefore vary proportionally less than that of the hydrological variation. As it i s intended that the dam will be constructed by early 2007, it i s anticipated that, depending on the timing of the scheduled commercial operations date (COD), the project could have the benefit of two wet seasons in order to be sure that the reservoir will be filled before COD. 28. Flood FZows. FloodFrequency Analysis usingthe flood records o f Nam Theun and XBF catchments indicates the following (Table 4): I Return Table 4: FloodFrequency Analysis Period (years) I Probability of Exceeding % 1 Flood Peak Estimates cumecs ] 20 5.0 3120 50 2.0 3560 100 1.o 3895 500 0.2 4865 1,000 0.1 5520 5,000 0.02 7430 10,000 0.01 8490 29. The Probable Maximum Precipitation (PMP) for the Nam Theun catchment was estimated by the Australian Bureau of Meteorology using the highest rainfall records in the region up to 2000. The Probable Maximum Flood was computed by making estimates of Probable Maximum Precipitation (PMP) for a range of durations using a non-linear event type rainfall-runoff model (RSWM), Tables 5 and 6. A 80 Table 5: PMPEstimates for NamThem at Nakai Dam Site Catchment 12-hour 550 24-hour 800 48-hour 930 72-hour 1010 15-day 2350 Table 6: PMFEstimates at Nakai Dam Site 30. Hydrographs were estimated for more frequently occurring floods, to assist in the design of the dam facilities. The results are shown below inTable 7: Table 7: Design Flood Estimates at NakaiDam Site 100 3,830 1,620 1,000 5,565 2,142 5,000 7,425 2,5 10 10,000 8,390 2,7 10 31. The spillway and reservoir will accommodate passage of the 5,000 years return period with the inflow peak of 8,360 cumecs (outflow 7,425 cumecs) with the reservoir at its maximum flood level. The spillway and stilling basin will be capable of discharging the PMF without overtoppin or endangering the main or saddle dams (Safety Check Flood concept). The PMF (13,500 m hec) can be discharged with 4 out of 5 gates in service, and with a maximum f reservoir level of 539.94 MASL (dam crest 541.5 MASL). A micro turbine andDiesel generator are foreseen as stand-by energy systems for gate operation. 32. Sedimentation. In its current conditions of largely undisturbed, pristine forest environment the catchment has a very low rate of soil loss (58 ton/ km2, or 0.04 "/annum) compared to global standards. The SMEC study of January 2004, using suspended sediment data at the dam site from June 1994 to September 1995 and from July 1998 to may 2002, speculates the following scenarios (Table 8): A 81 Table 8: Sedimentation Scenarios Scenario Topsoil loss Erosion Rate Sediment % Loss of ("/year) (kg/ha/year) load Storage Vol (tons/ year) in50years Current rate. National 0.04 580 231,530 0.28 parkinentire catchment, strict watershed management. I1 Controlled land-use, 0.16 2,920 1,160,OO 1.4 andforestry management I11 Uncontrolled 2.0 36,000 14,500,000 14.4 development 33. Storage loss under Scenario Ii s negligible. It could still be acceptable under Scenario 11. The occurrence of Scenario I11would severely affect the sustainability of the project. Given the morphology of the reservoir, broad and relatively shallow, control of sediment inflow by strict watershed management, i s the only feasible and sustainable sedimentation management option. B.2 Geology 34. Proven Geological Record - Introduction. The geological integrity of the project land, including the Nam Theun basin, the Nakai Plateau as well as the site of the main project assets (e.g. dam, saddle dams, underground works, and powerhouse) has been extensively reviewed and assessed by the Sponsors, independent consultants and experts, including the Dam Safety Review Panel (DSRP) appointedby the GOL. 35. These reviews have focused upon: 0 The geological stability and integrity, including the water-tightness, of the project site; and 0 The impact of potential geological impacts upon the project's successful implementation. 36. Geological Background. The project i s centered on the Nakai Plateau, which has the basic structure of a gently folded synclinal basin. The area i s generally underlain by mid-upper Paleozoic sedimentary rock (principally Devonian slates and Permo-Carboniferous limestone), which in turn i s overlain unconformably by Jurassic strata and then by successive strata of the Cretaceous and Tertiary periods. Recent lacustrian and alluvial sediments and colluvial materials are the youngest materials to have been deposited at the site. 37. The DSRP summarized the basic geological structures of the project area as follows: "The panel believes that the basic structure of the upper reservoir rock mass, a broad synclinal fold, (which also incorporates the lesser Nam Malou Basin) provides an ideal structural foundation for the reservoir. The basic structure and stratigraphic sequence, therefore, argue for the probability of low leakage volumes directly below the reservoir floor, the fundamental geologic arrangement i s favorable to proper completion of the reservoir." A 82 38. Investigative Studies Undertaken. Between 1984 to 2002, many geological and geotechnical studies have been undertaken by various qualified parties, including the sponsors and independent consultants. These have consisted of visual surface reconnaissance as well as surface and sub-surface investigations, including cored bore holes and seismic profiling. Laboratory and in-situ testing has also been undertaken to establish and confirm the design parameters. The principal investigations and studies are given at the end o f this section. 39. The DSRP commented that "the Panel has reviewed the initial landmark investigations of SMEC (1991), and reports by many different organization (Motor Columbus, ITD, Pacific Rim Power, Value Engineering Studies, Lahmeyer and Worley, Asian Institute of Technology, GMT Corporation) and subsequent investigations and compilations under the direction of EDF. The Panel believes that all relevant geological and geotechnical issues have been identified, that proper and adequate investigation programs have been conducted, and that the technical feasibility of the project i s established." 40. Rock Mass Structure. As a result of two primary tectonic events, the bedrock beneath the south-western escarpment i s inclined steeply. Whilst steeply inclined rock i s likely to contain high angle faults and shear zones, no major faults have been observed on field analysis or detected by seismic profiling in the area of the proposed headrace tunnel. Some bedding shear zones and local faults, resulting from the uplift during the Himalayan Orogeny, have been noted, and some local faults or shear zones in the transition and steeply inclined areas may also be present. 41. As the inclined rock strata may present local difficulties in construction it has been proposedto avoid extensive undergroundconstruction inthe zone of steeply inclined and faulted rock. 42. Also, any areas of significant geological concern that may arise in such steeply inclined areas will be protected by lining the relevant tunnels with a combination of concrete and steel linings. 43. Seismology. The site i s in a relatively quiet seismic area. The two closest currently active faults are along the Red River Fault and the Dien Bien Phu Fault, both in Vietnam, approximately 300 km away. There are also several other regional faults that are closer to the project than the two closest active faults, including the north-westerly trending Mekong Fault and the Kathang Valley trend, but there i s no evidence of any historic movement on any of these regional features. 44. EDF used a deterministic methodology in which all available data was reviewed to determine the most reasonably conceivable seismic event that might occur in the vicinity of the project or along known fault lines under the current stress regime. This analysis showed that the maximum credible earthquake that could potentially affect the project should be no greater than an earthquake of magnitude 5.3 on the Richter Scale occurring under the project site at a depth o f 13 km. The Operating Basis Earthquake from the same location was selected as magnitude 48 on the Richter Scale. Research by the Sponsors has shown that no seismic event of greater than magnitude 4.0 on the Richter Scale has occurred in, or affected, the site area source zone, The DSRP has stated that the seismic analysis was "well researched and, based on sound geologic interpretation of available data, and are appropriately conservative for use as a basis for selecting seismic design criteriafor theproject." A 83 Geological Impact Analysis on the Main ProjectAssets 45. Extensive analyses of the underlying geology in certain key areas o f the project have been undertaken to assess potential impact upon the construction and operation of the project. 46. Nakai Dam. Comprehensive investigations at the dam site have provided in-depth knowledge of the dam site geology and indicated good stratigraphic correlation across the site. In the final design stage the Nakai dam's axis was moved about 50 m upstream of the original position. This was decided in order to avoid the dam toe coming too near to an area where a deep, alluvium-filled, scour pit i s present. 47. The dam will be founded on the sandstone layer with a one line grout curtain of about 20 m depth and contact or consolidation grouting designed for seepage cut-off. A drainage gallery will be incorporated in the dam to provide for collecting water to monitor seepage and uplift pressure and to provide - if required - access for future seepage control by additional grouting. 48. The diversion works (for the early construction period) have been designed to form a 200 mlong/ 6 mwide concrete lined tunnel on the right bank, sufficient to cope with a discharge capacity of approximately 350 cumecs to handle flows up to the 10 years dry season flood. 49. The saddle dams have been designed to have embankments, with overburden of 3 - 5 m deep. Where the foundation i s below 539 MASL, the saddle dam will be built with an impervious core and with a foundation cut-off not less than 2.5 mdeep. 50. Reservoir. Given the presence of pinnacle karst terrain inthe region, a geological concern was the possibility that the reservoir area might be connected to caverns in the lower stratigraphic limestone and that limestone pinnacles might penetrate the Jurassic strata that underlie the reservoir area, resulting in water loss from the reservoir. This concern was compounded b y the existence of circular, saline solution ponds in a part of the upper reservoir underlain b y evaporites and hardclays of the Maha Sarakham formation. Detailed investigations undertaken b y SMEC in 1989-91 concluded that there was no path for seepage in the evaporitic strata to exit the reservoir. 51. Reviewing the underlying geology of the reservoir area, the DSRP commented "in summary, after reviewing the initial and successive reports regarding watertightness of the reservoir, and having seen the field conditions, the Panel believes that the limestone karst in the region presents no concern to the fundamental technical feasibility of constructing and maintaining the NamTheun 2 Upper Reservoir." 52. Headrace Channel. Geological and geotechnical testing and analysis between 1995 and 2001 have led to the following design: (i) The waterways will be cut into rock that varies from relatively weak alluvial soils and heavily weathered rock to sound rock; and (ii) where the cut slopes for the excavations cross gullies, they will be suitably protectedfrom surface run-off. 53. Headrace Tunnel, Surge Shaft and Pressure Tunnel. The construction of the underground works - comprising the headrace tunnel, the surge shaft, and the pressure tunnel - represents the greatest single geological uncertainty during the construction o f the project as the rock quality will only become known for certain during their construction. Significant work has A 84 been undertaken since 1995 to study the prospective rock quality to be bored and to assess the likelihood of any potential problems that might be encountered. 54. The headrace tunnel between the intake structure and the surge shaft, passes through the gently dipping Khok b a t formation and the steeply dipping Phra Wihan formation. Both formations comprise moderately weak to moderately strong sandstone, mudstone and siltstone. The rock characteristics at the site of the surge shaft and vertical pressure shaft were investigated indetail. The majority of the rock was found to be ingoodto excellent quality and impervious in nature. Drill hole investigations revealed that with the exception of a 1 m band of loose black clay at a depth o f 166 - 167 m, the majority of the rock was o f good quality. Further tests to determine the characteristics of the rock along the route of the pressure tunnel will be undertaken by the HC and/or the relevant sub-contractor duringthe construction phase. 55. In respect of the pressure tunnel, major investigation indicated that the structure of the formation in the pressure tunnel i s isoclinal with a general strike of N135% and a steep dip of 70' to almost vertical, with four sets of discontinuities. Along the pressure tunnel branch, the rocks are almost un-weathered, with the only weathering features consisting of iron stains along some aquifer discontinuities. 56. The sponsors, in conjunction with the DSRP, have specified lining of the underground works by a combination of steel and concrete. Investigations b y five additional deep core holes and associated testing carried out in 2001 by EGAT confirmed the favorable characteristics of the rock in the power conduits upstream of the adit and the possible opportunity to reduce the length of the steel liner in the pressure tunnel. 57. Under the current construction schedule, the underground works are required to be completed and to have undergone the initial test of the hydraulic circuit within 41 months of the commencement o f the works. 58. Power Station. As a result of the extensive site surveys and testing, the earlier conceptual design comprising an underground power station was changed to the current design of an external or surface power station. This will ensure that geotechnical construction risks are significantly reduced and the construction program will be more controllable. Investigations have also enabled the sponsors to assess the measures required for the safe excavation of the power station pit and construction of the power station and to implement these under the HC. During construction, the exposed cut rock faces will be stabilized by means of wire mesh and rock bolts, followed by shot-creting, and with rock anchors of a minimumlength of 8 m for the permanent rock wall supports. 59. Regulating Dam. Analysis of the site has dictated that the regulating dam will be constructed on slightly to moderately weathered mudstone and siltstone o f the Phu Kradung lower Jurassic formation. Investigations have shown that the site i s suitable for the proposeddam with adequate rock quality. The concrete gravity dam section will require consolidation and curtain grouting of the foundation and abutment as per the Nakai Dam. 60. Downstream Channel. The 27 kmlong downstream channel includes the construction of a 900 m long tunnel through a limestone outcrop approximately 7 km upstream from the junction with the Xe Bang Fai. With the exception of the tunnel, most of the downstream channel will pass through cohesive alluvium and limestone. With the exception of the proposed tunnel, A 85 investigation has shown that the underlying geology i s generally characterized by sedimentary rocks. 61. It is expected that the rock properties along the 900 m long downstream tunnel through the limestone ridge may be similar to the rock mass exposed at the nearby existing limestone Ban Pha Thoung quarry. Further investigations are plannedduring implementation. 62. The Sponsors investigated an alternative route around the limestone ridge and concluded that the underlying geology of the alternative route i s characterized by sedimentary rocks of possible Devonian age and limestone of Upper Carboniferous to Permian age, and the deposit of quaternary strata forming the topography of the Gnommalath area. Alluvium along this route along the Nam Phit channel i s generally soft to sticky high plasticity silty clays, clayey sands, sands, limestone gravel beds and some laterite. 63. Transmission Line and Mekong Crossing. N o major geological problems are foreseen with either the 115 kV line or the 500 kV line, although both will pass through some swamp areas (approximately 9.7 kminthe case of the 115 kV line and 15.2 kmin the case of the 500 kV line). The design of the Mekong Crossing will include foundations of bored piles at least 10 m into the rock below the bed of the river. Investigative Geological Studies 64. Investigation studies include the following: 0 1984: SMEC's studies of the reservoir water tightness and potential dam sites. This review formed the basis of the 1985 Prefeasibility Report recommending a 600 MW scheme discharging into the Nam Kathang basin; 0 1986: SMEC's visual surface reconnaissance of 15 kmo f the gorge upstream of the Nam Theun / Nam Phao confluence. This review recommended the siting o f the dam at a horseshoe bend approximately 2 kmdownstream of the entrance to the gorge; 0 1986-87: Motor Columbus' ranking study o f potential dam sites and a specific geological reconnaissance of the Nam Theun by Ewert, both of which recommended an alternate dam site 500 m upstream of that formerly recommended and which recommended a 280 MW scheme discharginginto the NamHinboun; 0 1989-91: SMEC's surface and sub-surface investigations to compare the two schemes (the Nam Kathang or Nam Hinboun discharge schemes) and the two dam sites, to establish the water-tightness of the reservoir, to study foundation conditions and the suitability of construction materials. This review -- which formed the basis o f the Feasibility Study -- included detailed geological mapping as well as sub-surface investigation consisting of diamond rotary boreholes and seismic profiling, pressure testing inthe boreholes and laboratory tests on soil and rock core samples; 0 1995: NTPC's surface and sub-surface investigation, including detailed geological mapping as well as sub-surface investigations. Borehole testing included pressure testing (dilatometer inrock and pressure meter in soil), with in-situ testing within the exploratory adit (including stress measurements and high pressure water tests) and a comprehensive laboratory test program on soil and rock samples; A 86 0 1996: ITD and Pacific Rim Power's engineering design services for the surface works, includingthe drillingof seven additional drill-holes for the damdesign; 0 2000: EDF's geologicalinvestigationsas adaptedto the new project's design; 0 2001: Sh4EC's investigations on the impact of additional riparian releases on the Xe Bang Fai River; 0 2001: STS Consultants undertook soil analysis by augur drilling at the HeadraceChannel andthe DownstreamChannel; 0 2001: EGAT undertook the drilling of deep core bore holes along the proposed pressure tunnel andpressureshaft routes; and 0 2001: Powergrid Consultants Co. Ltd., undertook sub-soil investigations for the transmission line andthe Mekong Crossing. A 87 Attachment 1 toAnnex 6 I Technical Details: Elements of the NT2Hydropower Component MainDam m e Sravity, roller compacted concrete r Crest Level El 540.0 Foundation Level EL 496 Maximum Height 44 m r Crest Length 315 m Saddle Dams Type Earthfill Number 6 Crest Level El 541.0 and 542.0 Spillway Type 5 radial gates in dam Still Level El 523.5 Size of each 15.5 mhigh by 16 mwide I Spillway Discharge Capacity at 9,200 m3/s FSL Inflow PMFPeak Discharge 13,500 m3/s Area to dam site 4,013 km2 Average Annual Runoff 7,380 million m3 1,840 mm Annual Sediment Yield 107 tons/ km2 FullSupply Level (FSL) El538 MinimumOperatingLevel (MOL) El528 Maximum Water Level (MWL) Surface Area at FSL El539.5 Surface Area at M O L Active Storage 450 km2 F Dead Storage at M O L 164km2 2,690 million m3 490_ million m3 ~ ~ ~ _ _ _ _ _ ~ ~ ~ Headrace Channel Capacity 340 m3/sat MOL Invert Level El522 Base Width 50 m Maximum Cut 14 m Length 13.7 kmincluding 6.5 kmof Approach Channel of almost no excavation Number of Openings 3 Size of Each 16 mhigh by 8 m wide Diameter 9.0 m Length 250 m Diameter 7.5 m Length 500 mSteel lined Diameter Variable 6.5 mto 3.4 m Length 75 m Lining Steel Branches 4 of 3.4 mdiameter, each of about 25 m length plus2 of about 1.4 mdiameter A 88 TechnicalDetails: Elementsof the NT2HydropowerComponent 'ower Plant* Power House her-ground Number of Units ;our (EGAT delivery) Turbines Jnder-hung Francis, each 252 MW Generators v'ertical axis, each B O M V N 2 5 2 M W Additional UnitTurbine 'rancisPelton, 40 M W Additional Unit Generator VerticaVHorizontal axis, $5MVAl40 MW Station Rated Power Output 280 MWe (EGAT) 40 MW(EDL) + Average Annual Generation 5,700 GWh Rated Net Head 355 m Synchronous Speed 333 rpm Machine Hall Maximum 154 m long by 22 m wide by 42 m Dimensions iigh :minor increases to be detailed) rransformer Hall Transformers Five 500 kV. Two 115 kV122 kV MaximumDimensions 108 mlong by 11.5 m wide by 17.6 m high Tailrace Tunnel UnitOutlets Four plus two small Diameter 4 @ 4.5 m and 2 @ 2.0 m Length 440 m Main Tunnel 1 Diameter 9.0 m Length 540 mplus 300 m incut and cover Tailrace Channel Bottom Width 50 m Length 2.8 km Regulating Weirs Crest Level Varies, El 176.5 to 179.8 Length of Structures RCC Dam 15 m high, 150 m long Earth-fill Dam on left bank, 300 m long Pondage 5.7 million m3 1 Gates Flood control. Channel flow diversion Downstream Bottom Width Channel Regulating Weir to Siphon To XBF incut (Conc. Lined) ,Last k t h r i p r a p First 15.8 km 11.8 km 118 km I Total Length Channel Batters 25.6 km Tunnel 2H: 1V; Riprap andberms inunlined section Maximum Discharge Capacity 0.7 kmConcrete lined Maximum Average Velocity 260 m3/s Outfall Varies in concrete lined and rip-rap sections Xe Bang Fai River Transmission Voltage 500 KV Line Circuits Single line. Double circuit Conductors 3 x 1272 M C M (4x1272 M C M across Mekong) 45 to 55 m Tower Height 300-400 m Normal Tower Spacing 144 km A 89 Length ThailandBorder Terminal Power station(NONEat Savannakhet) Substation RoadWorks GradeRehabilitation 88 km New Bridges NamTheun 320m NamNiam60 m RegulatingBasin 120m RehabilitatedBridges 6 New Road 53 km 8 kmaccess road + Barge 300T bargeMekongcrossing A 90 ttf Annex 7: ProjectCostsandFinancingPlan LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 Social andEnvironmentProject A. ProjectCosts DevelopmentCosts I 72.20 I 80.00 I 74.20 I EnvironmentalI SocialCosts 48.78 48.78 GOL Contribution (under clause 19.1of the ConcessionAgreement) 29.20 29.20 O&M Pre-OperatingExpenses 10.65 68.50 12.36 NTPC General& Administrative 29.58 161.36 33.62 BondingI Financingcost 17.06 17.06 Insurance 13.07 13.07 Contingencies 21.00 516.00 33.90 Working Capital 5.99 252.51 12.30 I GOL Works I 3.00 I I 3.00 1 I HeadConstructionContract I NTPC 1 1 1 Works 401.01 12,846.50 722.17 II GeneralContingencies 17.50 700.00 I 35.00 I ~~ NTPC General& Administrative II 6.57 II 35.86 7.47 II PPA LiquidatedDamages 42.45 498.00 54.90 I Provisionfor First Debt Repayment II 8.02 II 279.26 II * Subject to rounding errors A 92 B. FinancingPlan' Export Credit Agency Facility 205.00 205.00 - COFACE 140.00 140.00 - EKN 30.00 30.00 - GIEK 35.00 35.00 IDA PRGFacility ADB OCR Facility 45.00 45.00 ADB PRGFacility 45.00 45.00 MIGA PRGFacility' 45.00 I I 45.00 AFD Facility 30.00 I I 30.00 NIB Facility 30.00 30.00 Proparco Facility 30.00 30.00 Thai EximFacility 25.00 25.00 THB CommercialBankFacility 20,000.00 500.00 PrivateEquity 332.74 I 190.54 I 337.50 I GOL Equity** - 112.50 112.50 ADBLoan - 16.10 AFDGrant 6.20 - EIBLoan -- 41.00 IDAGrant 20.00 GOL Contribution (clause 19.1of 29.20 **Subjecttofinal confirmationin respect of die' ADB Loan and EIB Loanfacilities. T h i s financing plan i s subject to final terms and conditionsof various loadgrant facilities and foreign exchange movements. The financingplanwill be finalizedprior to financial close. The US$45 million of debt covered by MIGA represents the principal amount of debt only. MIGA also proposes to cover EDF's equity investmentinto the project (for about US$10million, as per its requirements of its Convention),interest on the US$ debt, and interest rate hedging instruments.These coverages translate into MIGA's gross exposure of up to US$200 million. A 93 Annex 8: ImplementationArrangements LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 SocialandEnvironmentProject A. Key ContractualAgreementsfor NT2Project 1. The Concession Agreement (the "CA") signed between Nam Theun 2 Power Company Limited ("NTPC") and the Government of Lao PDR ("GOL") on October 3, 2002 (as amended) i s the basis on which the Government granted NTPC a concession to develop, own, finance, construct, and operate the hydroelectric plant and related facilities (the "project"), and to transfer the project to GOL at the end of the concession period. The C A i s for a period of 25 years from the Commercial Operations Date under the Power Purchase Agreement between NTPC and the Electricity Generating Authority of Thailand ("EGAT" and the "EGAT PPA"). Under the proposed financial and contractual structure, the project's electrical energy will be sold under two long-term "take-or-pay" Power Purchase Agreements (PPA), (ii) the EGAT PPA; and (ii) a PPA with Electricit6 du Laos ("EDL"), together supplying intermediate peaking electricity at different tariff categories according to the time of the day it i s supplied. The C A also includes detailed provisions regarding the rights and obligations of both the GOL and NTPC, including those relating to G O L and NTPC Events of Default, Force Majeure Events andTermination. 2. The Sponsors' Agreement was signed on 3 October 2002 between EDFI, EGCO, ITD and the GOL. It sets out the rights and obligations of EDFI, EGCO and ITD in respect of the development of the project before the Construction Phase Commencement Date. 3. The Shareholders' Agreement ("SA") was signed on 19 September 2001 between EDFI, EDL, EGCO, and ITD and was acceded to by NTPC following its incorporation in September 2002. The SA sets out the rights and obligations of the shareholders, provides for the objectives, establishment, management and operation of NTPC, and agrees on the Articles of Association of NTPC. The SA has a duration of 45 years from signing. 4. The Head Construction Contract. NTPC will enter into the Head Construction Contract (HCC) with EDF (the "Head Contractor" or "HC"). NTPC will undertake the construction of the project through a HCC which i s a turnkey, price-capped engineering, procurement and construction contract between NTPC and the HC. The H C in turn will subcontract the construction works under five principal subcontracts: the Civil Works 1("CWl"), Civil Works 2 ("CW2"), Civil Works ("CW3"), Electromechanical 1 ("EMl") and Electromechanical 2 ("EM2") packages. 5. The EGAT Power Purchase Agreement ("EGAT PPA") was signed between NTPC and EGAT on November 8, 2003. It is the key contract for the project under which NTPC shall make available to EGAT generating capacity of up to 995 MW and electrical energy of 5,636 GWh per year to be purchased at agreed tariffs on a take-or-pay basis. The EGAT PPA i s for a period of 25 years from the Commercial Operations Date (COD) and includes provisions detailing the rights and obligations of both EGAT and NTPC, including the performance obligations of EGAT and NTPC, EGAT and NTPC Events of Default, Force Majeure Events and Termination. NTPC shall provide various securities (the Initial Development Security, the Additional Development A 94 Security, the Supplemental Security, the Performance Security; and the Additional Security) to EGAT to secure, in whole or in part, NTPC's obligations under the EGAT PPA. The cash securities are to be provided in the form of bank guarantees issued by or cash deposits held in Thai banks meeting certain criteria. These cash securities may be drawn down to meet any obligation by NTPC where NTPC has failed to pay any undisputedandor invoiced and disputed payments that have fallen due subject to cash drawn for disputed amounts being placed into an escrow account pending resolution of the dispute. 6. The EDL Power Purchase Agreement (or "EDL PPA") was signed between NTPC and EDL on November 8, 2003. It defines the obligation of NTPC to make available generating capacity of up to 75 MW and electrical energy of 200 GWh per year to EDL to be purchased at an agreed tariff on a take-or-pay basis. The EDL PPA will be for a period of 25 years from the date of Commercial Operations under the EGAT PPA and will include provisions detailing the rights and obligations of both EDL and NTPC, including the performance obligations of EDL andNTPC,EDLandNTPC Events of Default, ForceMajeureEvents andTermination. 7. The GOL Undertaking between GOL and EGAT identifies and establishes the parameters and framework that are required by all parties to effect a smooth transition of the project and the Project Agreements following a Company default or prolonged Lao PDR Political Force Majeure under either the Concession Agreement andor the EGAT PPA. Under the GOL Undertaking, the GOL recognizes that EGAT has certain rights under the EGAT PPA to step-in and/or purchase the project, and that EGAT i s able to enforce its security rights against GOL under the EGATPPA. 8. The Technical Services and Personnel Management Contracts include the operating and maintenance arrangements for the project. It i s NTPC's intention to undertake the operation of the project itself, but with the provision of technical support and staffing from EDF and EGCO (acting through its subsidiary ESCO) under Technical Services and Personnel Management Contracts. Four contracts are being entered into by NTPC, two each with ElectricitC de France (EDF) and EGCO Engineering& Service Co., Ltd. (ESCO), an operational subsidiary of EGCO. These are: (i)a Technical Services contract with EDF; (ii) a Technical Services contract with ESCO; (iii)a Personnel Management contract with EDF; and (iv) a Personnel Management contract with ESCO. These have been developed to ensure that a comprehensive operational structure can be implemented that will meet all of the operational obligations of NTPC under the CA, EGAT PPA and the EDLPPA. B. NTSEPImplementationArrangements B.l InstitutionalArrangements 9. GOL Implementation Arrangements. The C A specifies the division of labor between GOL and NTPC for the construction and operation phases of the project. In order to coordinate the involvement of several ministries, agencies, and provinces involved in the project, the GOL has established a steering committee for the project that reports to the Deputy Prime Minister. At the policy level, the responsible ministries include MIH, MAF, STEA, Ministry o f Defense, Ministry of Finance, and Ministry of Labor and Social Welfare, and the Resettlement Committee. These Ministries/Committee, guide the work of the project-specific entities - Environmental Management Unit (EMU), Resettlement Management Unit (RMU), Watershed A 95 Management andProtection Authority (WMPA), and the Lao Holding State Enterprise (LHSE)- that have been established (described in Annex 12). The Bureau of the Secretariat (BOS) of the Lao National Committee on Energy (LNCE) i s the Government-designated agency to oversee GOL's obligations under the CA, while the Government-owned Lao Holding State Enterprise will hold GOL's equity in the NTPC. The BOS will perform the Secretariat function for the Steering Committee. 10. NTPCImplementationArrangements.To fulfill its environmental and social obligations under the C A and implement the actions specified in the SDP and EAMP, NTPC has established an Environment and Social Management Division. The work of the division will be undertaken by two offices - Environmental Management Office and the Resettlement Office - and the functions of these offices are described in Annex 12. B.2 NTSEPProjectManagement 11, NTSEP will finance a part of the construction phase environment and social mitigation costs, amounting to US$20 million. NTPC i s responsible for implementing SDP and EAMP activities financed by NTSEP. In addition, it will also assist WMPA to implement the SEMFOP and MM to undertake the independent monitoring of the project by undertaking procurement, financial management, disbursement and progress reporting responsibilities. This arrangement was seen as a more effective alternative than a separate GOL implementation unit undertaking these tasks on behalf of WMPA, EMU and RMU or they individually carrying out the responsibilities. At negotiations, NTPC confirmed that they will assign qualified staff and instituted appropriate internal arrangements to implement NTSEP activities, satisfactory to the Bank. The Project Agreement between IDA and NTPC and the Tripartite Agreement among MoF, NTPC andLHSE will specify NTPC's project management responsibilities and obligations with respect to the three entities, which were confirmed at negotiations. The NTSEP implementation arrangements are explained in the main text and the different annexes, and catalogued below (Table 1). Table 1: NTSEPImplementationArrangements A 96 Annex 9: FinancialManagementand DisbursementArrangements LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 Social andEnvironmentProject Summaryof FinancialManagementAssessments 1. Financial management assessments were carried out in August 2004 and updated in November 2004 at the Nam Theun 2 Power Company Limited (NTPC), a joint venture company registered under the investment law of Lao PDR. NTPC will be the primary implementer of the project, The project consists of the power facility to be constructed, operated and maintained by NTPC and the Nam Theun 2 Social and Environmental Project (NTSEP Project). The assessments concluded that there i s a satisfactory financial management system in place for the project, but it needs to be upgraded to meet with reporting requirements on the NTSEP project's operations and activities. The project's finances will be accounted for and managed through the financial systems of NTPC. The currently used accounting software will be upgraded to a higher version that i s capable of accounting and reporting on the NTSEP project and generating multi- purpose reports. The current chart of accounts will be extended to capture NTSEP project transactions by component and expenditure category and will be capable of generating Project Financial Monitoring Reports (FMRs). The regular annual audit of NTPC performed b y an external independent auditor, currently PriceWaterhouseCoopers, is acceptable but the audit scope will be revised to cover the NTSEP's project financial management arrangements and project expenditures including eligibility for Bank financing and the reliability o f FMRs as agreed with NTPC. The annual financial statements are requiredto provide additional disclosures on the use of the Bank funds. Grant disbursement i s proposed to be based on FMR reports. A Special Account will be located at an acceptable bank and will be operated and managed by NTPC for paying project expenditures. The format of FMR has been agreed. The FMR will serve both purposes of grant disbursement and monitoring of NTSEP project progress. CountryIssuesand RiskAssessment 2. The Country Financial Accountability Assessment (CFAA), carried out in mid-2002 concluded that the overall fiduciary risk in Lao PDR i s considered to be high due to a weak internal control environment for the management of public funds and resources, insufficient transparency related to public finances. Public access to government financial information i s limited; there i s inadequate awareness of modern practices of internal control in the public sector; the oversight functions and the State Audit Organization need substantial improvements, and the accounting and auditing profession and institutions remain under-developed. The project and grant funds will not be managed through the government financial systems and therefore the fiduciary risks and weaknesses of the public sector are not significant in assessing overall project financial management risk of the project. 3. The project and the grant funds will be managed, controlled and accounted for b y the NTPC. The NTPC's financial systems are based on international accounting standards and are considered satisfactory and there are no substantial control risks. The NTPC staffs are well qualified and experienced in financial accounting and financial management. Incompatible duties are adequately segregated and procedures are well documented and regularly updated. It i s A 97 considered that there are no substantial contrd risks associated with the management and control of the project's finances, except unfamiliarity with the Bank's requirements, which differ from normal requirements of NTPC financiers, investors and shareholders. 4. Overall the project's financial management risk i s assessed as moderate. The NTPC's satisfactory financial management and procurement processes, systems and controls, together with competent, trained staff will mitigate the high country-wide fiduciary risks. The compliance risk due to unfamiliarity with Bank procedures and requirements will be mitigated through documentation o f procedures, learning and regular Bank advice. Supervision will be instituted throughout the implementation of the project, and there will be annual independent audits andthe requirement for submission of quarterly FMRs. Financial ManagementImplementationArrangements 5. NTPC will be the primary implementing agency for the project. It will be responsible for managing the finances of the NTSEP project and implementing two of the three safeguard plans (SDP and EAMP) and parts of the monitoring and evaluation activities, while the third plan (SEMFOP) and other monitoring and evaluation activities will be implemented by GOL with fundingprovidedby NTPC. 6. NTPC i s a joint venture company between the Lao Holding State Enterprise (LHSE), a Government o f Lao PDR wholly owned company (25 percent), and a group of foreign companies: ElectricitC de France International (35 percent), Electricity Generating Public Company Limited (25 percent), and Italian-Thai Development Public Company Limited (15 percent). The company has entered into a Concession Agreement (CA) with the Government of Lao PDR to develop, construct, own and operate the Nam Theun 2 Hydroelectric Project for 25 years. 7. The share holders of NTPC are commercial enterprise and have expertise and experience inthe project management of large contracts includingpower. The company through training and orientation in the Bank's requirements and procedures, the company will have adequate capacity and systems to implement and report on the NTSEP project. The Development Grant Agreement between the GOL and the Bank, the Project Agreement between the Bank and the NTPC and a Tri-partite Agreement between the GOL, the LHSE and NTPC will define the obligations of the GOL and the NTPC and that Bank funds will be properly managed by NTPC for implementing the NTSEP project. These agreements specify NTPC's project management responsibilities and obligations with respect to NTSEP. FundsFlow and Disbursements 8. The diagram below (Figure 1) provides an overview of the flow of funds and related agreements for the project. IDA grant funds totaling a maximum amount of US$20 million will be channeled through a Special Account (SA) managed by NTPC, with disbursement being report-based against FMR and on projections of expenditure for the following six month period (the next two quarters) and quarterly Financial Monitoring Reports (FMRs). The ceiling for the Special Account will remain varied. Disbursement of project funds for each project component for eligible expenditures will be made by NTPC based on the procurement plans and A 98 implementation arrangements for specific NTSEP project activities and financial intermediary arrangements. Figure 1: Flow of Fundsand Agreements Tripartite 7- Agreement (disbursement arrangements) 1 Loan and Developnient Shareholders Grant GOLSPV 4 Agreement MOF .-------.- Agreement Equity Contribution Agreement Kev f--------+ FinanceDocumentsIAgreements Lenders --.----Drawdown -P RequestI Withdrawal Application Flow of Funds 9. Withdrawal Applications along with the F M R s to replenish the SA will be prepared by NTPC and forwarded to the MOF with a copy of the GOL LHSE. The Withdrawal Applications will be reviewed and authorised by the MOF. Upon satisfactory review, MOF will submit the appropriately signed Withdrawal Application and supporting FMR to IDA under the Grant Agreement, IDA shall disburse directly to the Special Account. Documentation, which supports and authenticates the expenditures reported, will be retained at NTPC for review by the auditor, M O F L H S E and Bank missions. In order to ensure reliability of F M R s as a basis for disbursement, the audit terms of reference for the annual audit will be modified to provide specific opinions on the reliability of FMRs as a basis for disbursement and the management of the special account. As part of the audit, the system to compile FMRs will be assessedto ensure consistency with the accounts and records. 10. The Special Account (SA) will be opened at a bank acceptable to the Bank inthe name of the GOL. The GOL shall sign a notice of due authorization (valid for the period up to and includingthe Contingent Equity Release Date), granting NTPC the exclusive rights to withdraw A 99 moneys from the S A to fund NTSEP costs. NTPC will administer, as the sole signatory, the day- to-day expenditure from the Special Account to meet eligible costs as they fall due. The SA will be managed by NTPC under regular monitoring and control by M O F via reviewing and authorising withdrawal applications of grant funds from the Bank. As NTPC has never used SA facilities, written procedures and guidelines for the SA will be prepared by NTPC in consultation with the Bank and MOF. The Bank has provided the Bank Disbursement Handbook, Financial Monitoring Guidelines for Borrowers, and Guidelines on Annual Financial Reporting and Auditing World Bank-Financed Activities to NTPC and specific procedures and guidelines for the SA and procedures for disbursement arrangements will be developed by NTPC. PaymentProcesses 11. The NTPC, as implementing agency, will be responsible for drawing funds from the SA for payment of NTSEP project expenses. Payments will go through NTPC's financial systems and internal control processes. The defined fund flows arrangement for implementing each project component and specific arrangement to facilitate the implementation, particularly those dealing with the SEMFOP component, support for the expert panels, community-level arrangements and partner agencies, i s summarized in the diagram below. F l o w o f F u n d s - N T S E P D e v e l o p m e n 1 G r a n t A g r e e m e n 1 I D A ---+ F u n d s F l o w A g r e e m e n t s ( 1 ) Grant withdrarwais to the S A b a s e d on n e t projected funds requirements a n d quarterly F M R s for eligible expenditures ( 2 ) F u n d s withdrawn from the Special A c c o u n t for p a y m e n t s of eligible expenditures (3) P a y m e n t s to project expenditures b a s e d o n conditionslpayment schedules of contracts b e t w e e n BT P C a n d contracto risu p p lie rlcons u itantlN G 0 I C o m m u n itiesle tc (4) Funding a n d p a y m e n t s wiii b e m a d e b a s e d o n F i contracts ( 5 ) P a y m e n t s of project expenditures to contractor/supplierlconsultantlNGO/communityletc A 100 Staffing 12. The NTPC's Finance Division will be responsible for the financial management of project which includes the NTSEP Project. The financial management covers budget planning, accounting, financial reporting and audit arrangements. The Head of the Financial Division i s seconded from a shareholder, EGCO, a listed company in Thailand. The finance staffs are qualified and experienced in private sector financial management and accounting, but have not had experience in the financial management of Bank projects. Currently, the Division has four financial staffs and plans to hire additional staff to assume project responsibility. NTPC has a reliable recruitment system to ensure appropriately qualified and experienced staff are recruited. Overall, the staff capabilities and skills are considered adequate and responsive to Bank requirements. The FinanceDivision's staff will be trained in Bank requirements. Accounting Policiesand Procedures 13. The NTPC accounting policies and procedures are assessed to be satisfactory. The project's financial management of the project including accounting and payment procedures will be through the current system of NTPC. There are no substantial control risks. As such, creating a separate system for the project i s deemed to be inefficient and unnecessary. 14. NTPC's accounts are maintained in accordance with acceptable accounting practices; the accounts are maintained using the Peachtree accounting software, which i s assessed as acceptable. As the NTSEP project's finances will be managed and controlled through the NTPC's financial management systems, procedures and controls, there i s a need for further modification and upgrade of NTPC's accounting system and procedures to ensure proper accounting and reporting of grant eligible expenditures and to assure adequate capacity for future operations. NTPC i s preparing to upgrade the software to the higher version o f Peachtree Premium Accounting 2005. NTPC also plans to use more sophisticated software once the operations are fully operating with commercial revenues. The accounts are maintained on an accrual basis and NTPC's financial statements are prepared based on IFRS with the financial year from January to December and the standard currency i s U S dollar. 15. NTPC and the GOL will retain, all relevant records (contracts, orders, invoices, bills, receipts and other documents) evidencing eligible expenditures until at least one year after IDA has received the audit report covering, the fiscal year inwhich the last withdrawal from the Grant Account was made and make these available to IDA, as required. 16. Controls are inplace with adequate segregation of critical duties, adequate reconciliations, checks and balances. Preparer, reviewers and authorizers are defined clearly. Procedures are well documented and the chart of account provides adequate flexibility to extend for capturing expenditures specific for the project. 17. NTPC i s working on modification of the chart of accounts to enable NTSEP expenditures to be recorded by componentlsub-component and category of expenditure. The Bank has provided a proposed format of FMR and the nature of project information to be disclosed in the annual financial statements. NTPC i s makingsure that the chart will be able to generate the FMR and annual project information. By effectiveness, the Bank will assess the Chart of Accounts to A 101 ensure that it will capture the NTSEP project expenditures and be able to generate the required FMRsina timely manner. The budgeting system will also be reviewedto ensure consistency with the FMRformat. InternalAudit 18. The internal audit staff from EGCO, a shareholder visits NTPC annually. The EGCO internal audit's role and responsibilities are narrowed to serve the EGCO Board and Audit Committee which i s to ensure appropriate investment and financial control of EGCO's funds, not for NTPC as a whole. This arrangement is considered to be adequate. Internal audit adequacy will be revisited and suitable arrangements set up within NTPC (if needed), once the company i s in full operation. ReportingandMonitoring 19. NTPC will produce Financial MonitoringReports (FMRs) on a quarterly basis for NTSEP project and submit them to the MOF, LHSE and the Bank within 45 days after the end of each quarter (along with withdrawal applications each six months). The F M R s will cover project progress and variance analysis, financial statements on source and use of funds, project financial position, expenditures and physical progress compared with plans, procurement and contract monitoring reports. The project information will be disclosedfor both the current reporting period and cumulative to date. InformationSystems 20. The financial system is computerized. The accounting software capacity can provide adequate audit trails, accounting records and journal entries. General financial reports Le., trial balance, balance sheet; profit and loss can be easily processed from the system. NTPC also maintains systems for monitoring and evaluating financial and physical progress of project activities. Impactof ProcurementArrangements 21. The overall project risk for procurement was assessed to be high. The first two years' procurement plan (May 2005 -May 2007) has been developed and will be updated annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The procurement supervision will be carried out once every six months including ex-post reviews and visit the field to carry out post review of procurement actions, review of the procurement process, fiduciary check, end-use verification, record keeping arrangements, procurement capacity update, control mechanisms. 22. The "high" risk rating for procurement was determined by the Bank's Procurement Capacity Assessment of the agency's capacity to implement procurement. The risk rating in a PCA is determined before mitigation measures are designed and i s actually used to determine some of the mitigation measures (level of prior/post reviews, frequency of supervision, etc.). Through implementation of these measures, the project risk for procurement - although not explicitly rated -- i s expected to be considerably mitigated; the "Overall Risk Rating" (Modestlsubstantial), provided in Table 7 of the main PAD text, takes this into account. A 102 SupervisionPlan 23. Supervision will be carried out every six months for the first and second years of implementation together with reviewing the FMRs. Once the project i s runningsmoothly after the second year of implementation, frequency may be reduced to once a year. Audit Arrangements 24. The NTPC produces annual financial statements in accordance with I A S and IFRS which are auditedb y an independent auditor. The audit of the NTSEP project financial management and expenditures will be carried out along with the annual audit of the entity with the audit scope expanded to cover the eligibility of expenses disbursed under the basis of the F M R s , reliability of FMRs and Special Account transactions. The audited annual financial statements of NTPC are required to provide adequate disclosures with respect to project operations and status of Bank financing and must submitted to the Bank within six months after the end of each fiscal year. The NTSEP Project Agreement requires NTPC to include the requirement for the auditors to express an opinion on the eligibility of expenditures and the reliability of the F M R s of the NTSEP project. Recognitionof GOL LHSEEquity 25. NTPC will forward copies of the quarterly FMRs and withdrawal applications/six-monthly expenditure forecasts to the GOL LHSE. In accordance with the Shareholders Agreement, the NTPC will issue shares in NTPC to the GOL LHSE (to recognize the GOL LHSE's equity contribution) promptly following the NTPC's receipt of funds drawn from the SA for NTSEP eligible expenditures. Financial Management Action Plan 26. Inorder to ensure that NTPC has an adequate financial management system and capacity to meet the project's requirements, the following actions should be taken. Action Responsible Completion 1 Revise chart of accounts to capture project NTPC/Bank Before Effectiveness expenditures and to be capable of generating the quarterly FMR. 2 Training of Finance Officers and Accountants NTPC/Bank Before Effectiveness on Bank's financial management and project reporting requirements. 3 Agree disclosures required to provide grant NTPC/Bank Before Effectiveness project financial information inNTPC annual financial statements. A 103 Annex 10: Procurement Arrangements L A O PEOPLE'S DEMOCRATICREPUBLIC N a m Theun 2 Hydroelectric Project and Nam Theun 2 Social and Environment Project A. Procurement Review of the NT2Hydroelectric Power Project A.1 Background 1. The World Bank has had a detailed review of NT2 project procurement carried out in order to ascertain that it i s consistent with Bank procurement guidelines with regard to guarantees. Paragraph 3.16 of the May 2004 Bank Guidelines on Procurement under IBRD Loans and IDA Credits provides, in part, that:` "If Bankguaranteestherepaymentofaloanmadebyanotherlender,thegoodsand the works financed b y said loan shall be procured with due attention to economy and efficiency and in accordance with procedures which meet the requirements of paragraph 1.5." Paragraph 1.5 provides, in part, that: "the procedures to be used will fulfill the Borrower's obligations to cause the project to be carried out diligently and efficiently, and that the goods and works to be procured: (i)areofsatisfactoryqualityandarecompatiblewiththebalanceoftheproject; (ii) bedeliveredorcompletedinatimelyfashion; and will (iii)are priced so as not to affect adversely the economic and financial viability of the project." 2. The Bank wished to ensure that the cost of the project was reasonable and consistent with the cost of other privately-funded hydropower projects regionally and internationally, that the award of significant sole source contracts to project sponsors did not impair project economic and financial viability, that there were adequate opportunities for competition despite the reserved procurement o f two major contracts, that the evaluation process was transparent and equitable, and that the opportunities for conflicts of interest were minimal and, where present, were effectively managed so as not to harm the project. Accordingly, the Bank contracted an independent, reputed consultancy firm to review the head construction contract (HCC) and its components, including the three civil works (CW1, CW2 and CW3) and two electromechanical (EM1and EM2) subcontracts, and the management fee and risk premium elements of the head contract. A.2 Review Process 3. The Bank engaged Colenco Power Engineering (CPE) of Switzerland, a well qualified engineering firm with substantial international hydropower experience, to determine whether: ' Consistent with the Guidelines of January 1995, revised January and August 1996, September 1997, January 1999 and May 2004, paragraphs 3.16 (formerly 3.14) and 1.5. A 104 the procurement was carried out with due attention to economy and efficiency; the process followed allowed the interested international contracting community an opportunity to participate inthe competition; the risk sharing arrangements specified in the bidding documents were reasonable and have not unduly discouraged competition; the evaluation process was carried out professionally, in accordance with the bidding documents andin a transparent manner; the pricedrates obtained were reasonable taking into account the particular conditions associated with the project such as: location of the project site; local and international business environment; requirement to secure (in some contracts) associated financing; and proposedrisk sharing arrangements; the pricedrates obtained are comparable to other similar hydropower projects that have been executed in Asia (note: to increase the number of available comparators, escalation adjustments and relationship curves were also considered; for example, for turbines these would be curves relating cost per kW to MW, head and number of units); and the works, goods and services to be procured: (i)are of satisfactory quality and are compatible with the balance of the project; (ii)will, most likely, be delivered or completed in timely fashion; and (iii)are priced so as not to affect adversely the economic and financial viability of the project. CPE was to give special attention to the CW1 contract and the head contract because they have been procured directly without competition. 4. CPE was engaged to carry out a two-stage review: the first stage based on the progress of head contract negotiations to March 3, 2003; and the second stage to be conducted once the final bidevaluations and contract awards hadbeen completed. CPE was also asked to carry out a final analysis in January 2005 based on the updated information available and the impact of any subsequent changes. CPE presented its first stage report in June 2003, its second stage report in January 2004 and its final report in January 2005. A.3 Results of the Procurement Review Procurement Process - 5. Pre-qualification. About 50 companies participated in the prequalification process for all contracts which were competitively tendered. From the 37 firms which bid, 22 firms were pre-qualified. Given this level of interest, CPE concluded that the prequalification process was implemented in a manner providing sufficient opportunity for a large number of firms to participate in the project. 6. Bid processes, bidding documents and bid evaluation procedures. CPE's review found that the bid documents were very detailed and comprehensive, that they were arranged systematically, and that the treatment of interfaces, for example, (a key item in managing multi-disciplinary projects) was exemplary. All of the technical information concerning the project was made available to each pre-qualified bidder before and after the launching of the bidding documents through a site visit in May 2001, and the opening of a "Data Room" in A 105 August 2001 at EDF's offices in ChambCry, France. Rules of the biddingprocess, especially the intention to directly negotiate award of the CW1 contract to ITD, and then to the ITD-NCC joint venture, were known by all applicants from the beginning of the pre-qualification process. A four-phase bid evaluation procedure was generally adopted for packages CW2, CW3, EM1and EM2. CPE concluded that the procedures were similar to those adopted on other international projects; proceeding with simultaneous negotiations with 2 or more responsive bidders being a practice often used on privately funded projects. 7. Compliance with Bank procurement guidelines for PRGs. As a result of its review of the procurement process, CPE concluded that the prequalification, bidding and bid evaluation processes were consistent with World Bank guidelines for guarantees and that the results of this process were quite favorable to the project. 8. Other issues of concern to the World Bank - competition. The Bank asked CPE to comment on the extent to which the procurement process followed by the HCC and NTECNTPC had encouraged competition and on measures to limit conflicts of interest. CPE's reports contained an analysis of the changing competitive environment of privately sponsored hydropower projects, the impact of these changes on contracting practices for large international hydropower projects in general, and on the procurement processes selected for the N T 2 project by the head contractor inparticular. 9. CPE's conclusions. Given the limitations on likely competition in private hydropower projects, which also influenced the competitive environment for the N T 2 project, CPE concluded that there was considerable opportunity for competition in the procurement process followed by the HCC, that this process was consistent with standard practice in private hydropower projects and that there was unlikely to be any material improvement in the terms and conditions under which NTPC would be able to attract another qualified firm to undertake the N T 2 project. In CPE's judgment, the number of prequalification applicants for the competitively bid packages was reasonable for a private engineer-procure-construct (EPC) hydropower project and the procurement process offered adequate scope for competition, given the number of potential bidders which remained after prequalification. 10. Given the limitednumber of qualified bidders available and out of concern that this could indicate a "low" level of competition, consideration was given to re-bidding the contracts to try to increase the level of competition. However, NTEC decided that a new biddingprocess was not likely to result in a significant improvement in the results achieved and would probably jeopardize the achievements up to that point. CPE concluded that the results of the bidding and evaluation processes were quite favorable to the project and unlikely to be improved upon and that any re-biddingprocess would cause substantial delays to project implementation and cause associated risks to the price levels already achieved. 11. Potential for conflicts o f interest. When the project was re-launched in 1997,the investors agreed on several measures to limit conflicts of interest. First, they established a "turnkey consortium" and agreed that shareholders could not participate in both the management of the projectlturnkey contract and the actual contracts for execution o f the works. Second, the development group (NTEC) agreed to EDF's proposal to set up an "open-book pricing" type of turnkey contract to ensure transparency to all shareholders, as well as the GOL (a shareholder in NTPC, the successor company) and the World Bank. The final price of the turnkey contract would be the sum of the total prices of the subcontracts, plus the amount of the turnkey A 106 contractor's own services: project management, contingency provisions and remuneration of the risks taken by the turnkey contractor. A.4 Resultsof theProcurementReview Outcomes - 12. The Bank required CPE, as part of its TOR, to make its own independent estimates covering at least 80 percent of prices and rates obtained in the bids in order to establish an independent benchmark for judging the competitiveness of the original bid prices of the HCC and each of the five subcontracts before it began its review of the bid documents. CPE made detailed calculations, on an item-by-item basis, using quantity estimates from EDF and from the contractors' bids, and then made its own estimates of unit prices. These estimates were based on CPE's extensive international hydropower project experience, a key consultant selection criterion, and its record of costs of similar projects, particularly in the Southeast Asian region, and ongoing cost evaluation activities for Thailanwyanmar border projects, turnkey projects in the Philippines and recently completed projects in Indonesia. CPE also used current unit and lump sum prices from international competitive bids for conventional contracts in Far Eastern countries. In order to adjust the rates to be adequate for EPC/turnkey contracts, CPE added the additional costs for this type of contract to the conventional contract rates. Where there were competitive bids, CPE made its comparison with each offer. 13. CPE analysis. CPE made its own estimates of the expected prices of the five subcontracts. Only the C W 1 contract was higher than its estimate. The lowest qualified bid for each of the other four subcontracts ranged from 4 percent to 32 percent below CPE's estimates. CPE concluded that the higher price of the C W l contract could be explained by excessive specialist subcontractor prices for the supply of specialist equipment, which was later deleted, and differences in headrace excavation quantity estimates, which were later reduced. CPE considered the final prices included in the CW1package acceptable. CPE also concluded that the addition of a financially strong international partner, with roller compacted concrete dam experience, provided ajoint venture of acceptable qualifications for this contract. 14. CPE determined that the prices bid for the EM1and E M 2 subcontracts were comparable to those of other similar hydropower projects in Asia. Given the quality and experience of the EM1and EM2 contractors, CPE concluded that the design, supply and construction of the lines would be completed in a timely manner and at reasonable prices. 15. Review of Updated Prices.As part of its stage 3 report, the Bank asked CPE to revisit the costs of the head contract to determine ifthe procurement outcomes two years after CPE's first report met the economy and efficiency criteria. CPE's analysis showed that, based on the original exchange rates, the price was US$523 million, US$41 million (or 8 percent) below its original aggregate base case cost estimate of US$564 million. 16. However, when calculated at the relevant exchange rates at January 17, 2005, and including escalation (between bid based date and one month before signing of contracts, the cost of the five subcontracts increased by about US$66 million (about 13 percent) from the original offers to US$584 million. On the whole, CPE found that the price changes are reasonable and due largely to the sharp depreciation inthe value of the US dollar (about US$46 million, or about 69 percent of the increased cost), agreed escalation (an additional US$15 million) and relocation of the Nakai dam (US$5 million). A 107 AS Results of the Procurement Review -Head Construction Contract 17. The Bank asked CPE to assess the head contract by making an independent estimate of the main components of that contract, the proposed management fee and risk premium, usingits own estimates of the staffing requirements necessary for the success of the project and by comparing the proposed rates with its own judgment of international and regional rates for such personnel. 18. Management Fee. CPE's estimate of the management fee portion was about US$1 million below the range agreed between EDF and NTPC in June 2003. However, CPE conditioned its judgment, noting that the NT2 project is not a conventional hydropower consultancy, but a head contracting role, with greater attendant risk and responsibility, thus requiring greater attention from headquarters, sufficient personnel in Lao PDR and a strong field-based E&S management presence, which would justify a fee in the agreed range. 19. Risk Premium. As a lump sum, fixed price contract, the Head Construction Contract provides the single point of responsibility required by the financing parties. The HCC i s structured in such a way that the risks are taken, in the first instance, by the subcontractors and then by the HCC, which i s the party to the main contract with NTPC, the owner. There are only limited cases - those covered by the target pricing mechanism and associated unforeseeable conditions provisions - in which the owner takes on construction risk. Thus, the amounts set aside as risk contingencies require careful assessment to determine if they are reasonable given the risks to each party. 20. Each of the main parties involved in the project - NTPC (owner), EDF (head contractor) and the GOL - engaged a specialist firm, each using a different risk modeling software, to assist it in establishing the appropriate level of risk provision to be made and to check on the risk calculations of the head contractor. 21. In order to judge the appropriateness of the risk premium and compare, at least indicatively, the possible implications o f differing assessments, CPE prepared a new risk schedule covering all 56 risk events, includingits own assessments o f the same items, as agreed between the HCE/GOLE/OE, and then carried out a simplified probability cost determination, totaling the risks both with and without probability adjustments. 22. CPE concluded that the risk analyses carried out for the project by the HC and other firms have satisfactorily considered the types of risk, the likelihood of their occurrence, the probability of distribution of financial consequences and the risk allocations between the parties. As a result, CPEconsidered that the proposal to adopt the risk provision was reasonable and acceptable. This assessment was revalidated inJanuary 2005. A.6 Conclusions and Recommendations 23. CPE has carried out three assessments of NT2 project procurement over the past two years, as well as its "Supplemental Study" in 2003. Based on its assessment of the expected cost o f the various components of the HCC, from the original bids prepared in 2002 through the most recent negotiations over the cost of the head contract and the five subcontracts carried out in early 2005, CPE concluded that the cost of these components, and of the HCC as a whole, are reasonable and acceptable, that they are consistent with the objectives of the Bank's procurement guidelines on economy and efficiency, and that they are broadly consistent with the outcomes A 108 which might be excepted under competitive biddingfor the NT2 project in a country such as Lao PDR. B. NTSEP-RelatedProcurementArrangements B.l General 24. 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 May 2004); and Guidelines: Selection and Employment of Consultants by World Bank Borrowers (dated May 2004), and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category are described below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the IDA in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 25. Procurement of Works (US$9.89 million). Works procured under the project, would include but not limited to clearance of village sites (dismantling of old houses) and construction of new houses, all weather access roads and access roads to and within the village, construction and rehabilitation of health center and hospital, office construction, construction of irrigation systems, domestic water supply, community buildings, and fishing infrastructure (boat landings construction). The procurement will be done through National Competitive Bidding (NCB), in accordance with the Bank's Procurement Guidelines and following the detailed procedures for Public Bidding as laid out in Decree No.O3/PM dated January 9, 2004, and Implementing Rules & Regulations No. 0063MOF (IRRs) dated March 12, 2004, in that they complement each other. The applicable national standard bidding documents developed by the Procurement Monitoring Office (PrMO), Ministry of Finance, will be used. Small Works estimated to cost less than US$30,000 per contract may be procured through (i) Shopping, following the detailed procedures for Price Comparison as laid out in the above-mentioned Decree and IRRs, incorporating the Special Provisions listed below, and using the national standard Request for Quotation (RFQ) documents developed by PrMO, or (ii) Community Participation in accordance with the procedures laid out in the Project Implementation Manual. 26. Procurement of Goods (US$2.38 million). Goods procured under this project would include but not limited to: office equipment, vehicles, generators and electric supply, medical and laboratory equipment, camping equipment. Goods, with the exception of vehicles, estimated to cost more than US$lOO,OOO per contract shall be procured through International Competitive Biddingprocedures using the Bank's Standard BiddingDocuments. Vehicles shall be procured through IAPSO. Goods estimated to cost less than US$lOO,OOO may be procured through NCB, inaccordance with the Bank's Procurement Guidelines andfollowing the detailed procedures for Public Biddingas laid out inthe above-referenced sub-decree and IRRs,inthat they complement each other. The applicable draft national standard bidding documents developed by PrMO will be used. Goods estimated to cost less than US$30,000 per contract may be procured through (i) Shopping, following the detailed procedures for Price Comparison as laid out in the above- mentioned Decree and IRRs, incorporating the special provisions listed below, and using the national standard RFQ developed by PRMO, or (ii) Community Participation for procurement of A 109 goods for fisheries, forestry, agricultural and livestock development in accordance with the procedures laid out in the Project Implementation Manual. The development of agricultural and livestock management systems and sustainable management of forestry and fisheries are important components of livelihood activities on the Nakai Plateau which are envisaged to be integratedwith the community development activities and strengthened by procurement of goods (main portion) and works through community participation with necessary training. 27. Special Provision for Shopping. For purposes of improving economy, efficiency and transparency, the following special provisions shall apply to contracts for Works and Goods estimated to cost between US$5,00O-US$30,000: (i) Invitations to quote shall be advertised in at least one newspaper of provincial/regional (or national) circulation, and a minimumof 10 days for the preparation and submission of quotations shall be provided. (ii)Prior-registrationshallnotbearequirementtoparticipateinquotationprocedures. (iii)Quotationsshallberequiredtobesubmittedinsealedenvelopes. (iv) Quotations shall be opened in public immediately after the submission deadline in the presence of bidders andproject beneficiaries who choose to attend. (v) A copy of the quotation opening record shall promptly be posted at a prominent location outside PMUoffice, and a copy will also be sent to all bidders who submitted quotations. (vi) There shall be no post-bid negotiations with the lowest or any other bidder. In case the lowest evaluated responsive quotation exceeds the pre-bid cost estimate by a substantial margin, the Procuring Agency will assess the reasons for the price difference and recommend the course of action for approval by the Head of the Procuring Agency. (vii) A summary of contract award information shall be made public through an announcement in the press and updated on a quarterly basis. 28. Training (US$1.30million). Various training for Resettlement Management Unit (RMU) and District Resettlement (or Compensation) Working Group (DWRGs) staff and training of villagers on livelihood program would be procured using the procedures acceptable to the Bank with due consideration to quality, efficiency and cost effectiveness. 29. Selection of Consultants (US$6.06 million). Consulting services include but not limited to: external monitoring of the project resettlement process, UXO Clearance, Xe Bang Fai Fisheries and non-fisheries compensation program, monitoring and survey. These services would be procured through various selection methods including QCBS, QBS, CQ, LCS or SSS for f i r m s and Selection of Individual Consultant (IC) depending on the nature, value and complexity of the assignments. The use of these methods for specific assignments will be prior reviewed and cleared with the Bank in the Procurement Plan. However, CQ methodwould apply to assignment estimated to cost not exceeding US$lOO,OOO per contract. Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Such contracts will be procured in accordance with the Bank's Consultant Guidelines and following the detailed procedures for Selection of Consultants' or Experts' Services as laid out in Decree No. 0 3 P M dated January 9, 2004, and Implementing Rules & A 110 Regulations No, 0063/MOF (IRRs) dated March 12, 2004, in that they complement each other. Non-governmental Organizations (NGOs) or UN Agencies are also expected to participate in services to provide assistance in the preparation, management and implementation of "Community Development Packages" on Agriculture, Livestock, Fisheries and Forestry which are expected to be carried out through Community Participation. 30. Operational Costs (US$0.45 million). Operating costs are applicable for per diem, transportation and accommodation of RMU Nakai/Xe Bang Fai staff, reports, maintenance of office and field equipment, maintenance and fuel of vehicles, health center operating cost. These operating costs shall be procured using the NTPC's administrative and financial management procedures and/or other procedures, provided that these procedures shall be acceptable to the Bank on the basis of quality, efficiency and cost-effectiveness. B.2 Assessmentof the Agency's Capacityto ImplementProcurement 31. Procurement activities will be carried out by the NTPC. Key staff positions are expected to come from the shareholders of the company, especially EDF and EGCO, and from EDL. At present, the procurement unit i s staffed by one procurement officer. A Procurement Advisor with more than 30 years of experience with the Bank's procurement process joined the procurement team in February 2005 on a part time basis for the first six months of the project (and a possibility of extension, if necessary). The Procurement Advisor will have responsibility to prepare the first lot of bidding documents and RFPs and to train a new additional procurement officer who will be recruited tentatively before May 2005. However, since October 2004, the Social and Environment Director was recruited and due to his extensive experience with the Bank's projects in several countries both on his technical background and on procurement, he i s a very useful resource to assist on preparation of the procurement plan and may be able to assist during implementation of the project, in addition to the Procurement Advisor and two procurement officers. 32. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by World Bank staff, starting in July 2004 (with NTPC in Bangkok) and visiting the project office in Lao PDR in August, December 2004 and January 2005. The assessment reviewed the existing organizational structure of NTPC and NTPC's procurement procedures and rules, since NTPC, as a limited liability company incorporated under Lao PDR law, i s not obligated to follow the Government's procurement regulations. Findings on NTPC's process are in the Procurement Capacity Assessment Report which will be in the project file. The main findings are that NTPC's existing procedures for procurement of goods and works, which are limited to Shopping restricted to a pre-established list of vendors, are inadequate for carrying out the project's procurement, particularly ICB and NCB. NTPC presently does not have any established written procedures for selection of consultants. NTPC also has no prior experience in carrying out procurement under the Bank's procedures. 33. Most of the issues/risks concerning the procurement component for implementation of the project have been identified and discussed with NTPC since August 2004. It was agreed that the Bank's Guidelines and the provisions of the Credit Agreement would be applicable to all procurement under the project. For procurement of Goods through ICB, and selection of consultants through international competition, the detailed procedures laid out in the Bank's Procurement and Consultants' Guidelines will be followed. For procurement o f goods and works A 111 through NCB and Shopping, and selection of consultants through national competition, the detailed procedures laid out in sub-decree No.03PM dated January 9, 2004, and IRRs dated March 12, 2004 will be followed, in that they complement the Bank's Guidelines. Although some capacity strengthening measures have already been taken, such as engagement of the Procurement Advisor, and advertisement for the second procurement officer who i s expected to be engaged by March 30,2005, the overall project risk for procurement at present i s still "High". B.3 Procurement Plan 34. The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team in January 2005 and the first two years procurement plan (May 2005 - May 2007) i s available at NTPC's office in Vientiane Lao PDR. It will also be available in the project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the project team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. B.4 Frequency of Procurement Supervision 35. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended once every six months supervision missions, including ex-post reviews. Ex-post review will be at least two in ten and will include review of the procurement process, fiduciary check, end-use verification, record keeping arrangements, procurement capacity update, control mechanisms etc. A 112 Attachment 1 to Annex 10 1. Details of the Procurement Arrangement Involving International Competitive Bidding (i)ListofcontractPackageswhichwillbeprocuredfollowingICBmethod. (ii) firstNCBcontracteachforgoodsandworksirrespectiveofvalue,eachcontractfor The goods and works exceedingUS$lOO,OOO, and all contracts involving Direct Contracting, I will be subject to prior review by the Bank. Component 1:Social Development Plan (SDP) Year 1-GOODS Ref. Contract Estimated Procurement Domestic Review Expected Comments No. Description cost Method Preference by Bank Bid- (yesfno) 1 Medical and US$249,600 ICB No Prior August Laboratory Equipment 2. Consulting Services. (i)ist ofConsultingAssignmentswith short-list ofinternational firms andsingle source L selection. Component 1:Social Development Plan (SDP) Year 1-GOODS 3 4 5 6 7 Ref. No. Description of Estimated Selection Review Expected Comments Assignment cost Method by Bank Proposals (Prior f Submission Post) Date 1 External US$300,000 QCBS 11Prior IIJune2005 Monitoring of the Firm project Resettlement Process (5 years) 2 UXO Clearance US$582,500 QBS Prior June 2005 Services Firm 1 2 3 4 5 6 7 Ref. No. Description o f Estimated Selection Review Expected Comments Assignment cost Method by Bank Proposals (Prior f Post) Submission Date 1 Panel of Experts US$1,150,000 Single Source Prior Year 2009 Selection A 113 (ii) Consultancy services estimated to cost above US$lOO,OOO per contract for firms, estimated to cost above US$50,000 for individual and all contracts involving Single Source Selection of consultants (firms or individuals) irrespective of value, will be subject to prior review by the Bank. (iii)Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultants Guidelines. A 114 Annex 11:Economicand FinancialAnalysis LAO PEOPLE'S DEMOCRATIC REPUBLIC NamTheun 2 HydroelectricProject and NamTheun 2 Socialand EnvironmentProject A. Economic Analysis A.l Scope of Analysis and Sources of Data 1. The economic analysis for the NT2 project addresses three fundamental questions: Does the Thai market, which will absorb about 95 percent of the power generated by NT2, need the power from this project? I s NT2 an economic, least-cost source of electricity supply to the Thai and Laotian power markets? How robust i s the base-case answer to this question? What i s the project ERR and how sensitive i s it to alternative key assumptions? 2. The economic analysis covers the regional power market, defined as the power markets of Thailand and Lao PDR supplied by the project. NT2 i s essentially an enclave project harnessing water in Lao PDR to provide about 95 percent and 5 percent of its electricity to the Thai and Laotian power markets, respectively. Without the project, Thailand adopts its next best alternative and Lao PDR imports additional electricity from Thailand, this being its most economic alternative, as discussed below. 3. The main data sources for the Thai power market are EGAT, MEA and PEA, who gave generously of their time and information to meet the Bank's due diligence requirements. Much of the least-cost system expansion analysis for Thailand was carried out in EGAT, based on terms of reference developed by the Bank and key input assumptions acceptable to the Bank. A series of interviews with the Department of Mineral Fuels, National Energy Policy Office (both of the Thai Government), PTT, UNOCAL, Amerada Hess, ChevrodTexaco and Total/Elf/Fina were very helpful for developing economic information on prospective demand and supply conditions and the value of natural gas in Thailand. This i s important, because natural gas i s the backbone fuel for the Thai power system and combined cycle gas turbine (CCGT) plant i s the current and projected economic generation alternative to NT2. Information about NT2 project investment and operating costs, and the environmental and social (E&S) costs and benefits come from the Lenders' financial model of December 2004. EDL, LahmeyerNaunsell International and the tariff study prepared for Lao PDR by Elektrowatt AG, Ekono Ltd. and Fichtner provided most of the information needed for evaluating the economic merit of NT2 in the Laotian (Central-2 grid) context. A.2 The Thai and Laotian PowerMarkets 4. The economic analysis for the project seeks to determine whether or not the NT2 project i s an economic, least-cost component of electricity supply to the Thai and Laotian power markets. This question is addressed with a comprehensive analysis of electricity demand and supply in Thailand, the main market for the project, and a brief analysis of the Laotian market. Furthermore, a probabilistic cost-risk analysis has been done for the Thai market to see whether a A 115 decision to proceed with NT2 for the intended commercial operations date (COD) of November 2009 i s economically robust to a wide range of electricity demand growth rates, N T 2 project costs and values of natural gas. These are the key uncertainties that could have a substantial impact on the value of a decision to buildthe project. Historic Demand and Supply Conditions in Thailand 5. Demand and supply conditions inThailand are of particular importance as the country now has surplus generating capacity, because of the economic downturn in the late 1990s and the large amount of capacity that was then under development and could not be stopped on reasonable terms. In 2004 peak load was 19,325 MW. Adding a 15 percent margin relative to peak load for reserves (EGAT's generation reliability requirement), the installed capacity requirement was about 22,224 MW; however installed capacity was 25,705 MW, resulting in an excess of 3,480 MW, or 15.7 percent of peak load plus required reserve.' With economic recovery underway for the past several years, demand for electricity has resumed the growth that was interrupted in the late 1990s. The Thai power market i s very large, hence low rates of change on a large base result in large absolute reductions of surplus capacity inthe medium term and requirements for large amounts of new capacity over the longer term. This is the case even after including realistic estimates of savings achievable through demand management and energy efficiency programming.2 Some large hydro projects can be economically challenging because of slow rates of capacity absorption in the receiving power system. While 920 MW net (the Thai share of NT2 capacity) sounds large, as shown in the analysis below, by COD it i s likely this amount of capacity would be needed to meet the system reliability criterion and would be absorbed in less than one year of demand growth. Hence, in the case of NT2, the more important issues concern the appropriate timing of new power plants and comparative costs between NT2 and natural gas-based CCGT plants, given Thailand's access to large volumes of natural gas. 6. The analysis begins with a retrospective on the demand and supply situation, then looks at demand and supply projections and the timing of the NT2 investment, followed by an analysis of comparative project costs and the least-cost risk analysis. 7. Over the decade 1993 to 2003 inclusive, GDP grew at an average' annual rate o f 3.1 percent and electricity demand 6.5 percent. This relationship i s shown in Graph 1, where the base of the GDP index i s scaled to the level of base electricity consumption (1993) for ease of graphing and comparison between the two series. ' EGAT: "Thailand Power Development Plan", Bangkok, August 2004. The inference that capacity exceeds target reserves is ours, based on demand and supply data inthe referenced document. The Bank commissioned an independent assessment by Danish Energy Management AIS, Bangkok (March 2005) of incrementalenergy conservation, demand management and renewable energy potential for Thailand. A 116 Graph 1:ElectricityProductionand GDP Growth (Thailand, 1993-2003) 140000 120000 ' 100000 c 5X0 80000 U 60000 n (3 40000 20000 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year /EGDP index HGWh producedI Source: GDP data: WorldBank: Electricity Production, EGAT 8. Graph 1indicates that trend changes of electricity demand lagged those of GDP and were much less severe: 0 In 1997, at the peak of the Asian financial crisis, electricity demand grew while GDP shrank. 0 In 1998 electricity demand droppeda littlewhile the GDP decline was large. 0 In 1999 GDP started to recover but electricity demand didnot. 0 From 2000, electricity demand growth substantially out-paced GDP growth. Over the four years from end 1999-2003 total GDP growth was 19.1 percent and electricity demand 29.1 percent. 9. This kind of relationship is not surprising, as the stock of electricity-using equipment does not shrink with a short (even severe) economic downturn, while consumers and businesses tend to expand their equipment stock as the economy recovers. On the whole, high growth of electricity demand cannot be attributed to subsidized pricing. On average, Thailand has commercial cost-recovery tariffs subject to regular periodic adjustment, as laid down in legislation. There are cross-subsidies between utilities and consumer categories. 10. There i s a discrete change in the demand growth profile comparing the early 1990s to the early 2000s. Until 1996, electricity demand growth ranged between about 9 percent and 14 percent per year, compared with 5 percent to 7 percent since 2000. Recent GDP growth has also lagged the rates of the early 1990s. It was only by 2002 that GDP recovered to the 1996 A 117 level. In 2003, GDP grew b y 6.7 percent (well above most forecasts for growth in the 5 percent range) and electrical energy consumption (GWh) grew by 7.7 percent (also well above the forecast of 5.9 percent). In 2004, peak load was 19,325 MW versus forecast peak load of 19,029 MW. Hence the demand forecast has been considerably over-achieved in respect of energy consumption (GWh) and slightly over-achieved in respect of peak load (instantaneous MW of demand at peak), Thailand has low and stable system losses - about 7 percent from generation to end-user. Electricity Demand and Supply Forecast in Thailand 11. Thailand has a sophisticated, institutionalized electricity demand forecasting process. The national electricity demand forecast used in this study i s that of August 2002. It projects energy production growing by 6.17 percent per year, on average, from 2003 to 2016. Thai GDP grew at 6.7 percent in 2003 and the Bank expects continued growth in the range of 5 percent to 6 percent per year from 2004 to 2008; hence, based on recent experience, the electricity demand forecast is well related to the range of expected GDP growth. With GDP growth in this range, the demand forecast may understate requirements; this probably explains why Thailand revised the demand forecast upward in January 2004. For purposes of project evaluation, however, the Bank has maintained the lower 2002 forecast. A lower rate of demand growth challenges the project's economic viability, thus providing a more severe "Base Case." It also reflects an implicit judgment that the 2002 demand forecast may embed less downside risk than that of 2004. 12. The demand forecast includes 982 MW of demand management programming that EGAT considers reasonable to achieve from 2006 to 2010. This means that the base case demand forecast has been reduced by 982 MW relative to what it would have been without this programming. In a separate study on demand side management (DSM) and renewable energy potential in Thailand commissioned by the Bank,4 the author concluded on the basis of a careful review of existing studies that DSM and energy efficiency programming could be as much as 2,207 MW at peak, or 1,225 MW above the estimate now included in the base case demand forecast. Achieving D S M potential depends upon the efficacy of intentional programming and the response o f millions of electricity consumers. The larger the estimated amount of D S M potential, the greater the uncertainty of achieving it. This consideration makes it reasonable to consider this incremental 1,225 MW of demand management as part of the demand risk analysis. Seen in this context, the additional 1,225 MW would change peak demand in 2010 from 27,263 MW to 26,038 MW, thereby reducing the base case demand growth rate between 2002 and 2010 from 6.6 percent per year to 6.0 percent per year; however, the low case demand growth rate adopted for sensitivity testing in the analysis for this PAD i s 3.4 percent per year over the same period. Hence, this uncertainty about the extent of additional D S M i s a small part of the already assumed demand uncertainty range for the risk analysis in this document. As well, the expected base case increase of peak load plus associated reserve would be 1,913 MW between 2009 and Additional detail on most items addressed in this Annex can be obtained on request from a supplementary Appendix in the project file. For the demand and supply and least-cost analyses, readers are also referred to the Bank-commissioned Thai power market study: Vernstrom, R. "Nam Theun 2 Hydro Power Project - Regional Economic Least-Cost Analysis", Bangkok, March 2005. Peter du Pont, "Impact of Energy Conservation, DSM, and Renewable Energy Generation on EGAT's Power Development Plan (PDP),Danish Energy Management A/S, Bangkok, March 2005. A 118 2010. Hence, if all of the additional 1225 MW D S M were achieved, this would still only delay the optimal timing of the NT2 project b y less than one year. 13. On the basis of this demand forecast, excluding new plant from end-2003, the capacity surplus will be consumed by 2006 (see Graph 2).5 B y 2009, Thailand will need approximately 5,900 MW new capacity.6 Graph 2: Capacity Gap Thailand (2003 2016) - - """"" I 30000 . 25000 - 20000 - 15000 - 10000 5000 0 -5000 Year l+Net beforeadditions +Peak load 15% Res *Capacity + Gap (surplus)I 14. To fill the expected capacity gap, apart from the net 920 MW from NT2, EGAT will need to buy new capacity or refurbish old capacity, bringing demand and supply into near-balance over 2008-2009. However, by 2010 a capacity deficit approximately the size of its NT2 share opens, growing to about three times that amount by 2011. From the time NT2 i s expected to be commissioned, it will displace the most expensive thermal energy on the system and cater for demand growth. 15. Peak load will grow at about the same rate as energy consumption, implying a stable system load factor of about 0.734. At this growth rate, the annual increase of energy requirements starts at 6,371 GWh in 2003, becomes 10,940 GWh in 2009 and 13,514 GWh in 2016. Absorption of excess capacity could be completed earlier if consumption continues to exceed the forecast. The slight bump-up of incremental demand in 2009 relative to trend growth (Graph 2) happens because a large scale new steel mill (Sahaviriya Steel Group) is expected to commence operations that year. A 119 16. B y contrast, NT2 will supply Thailand with about 5,354 GWh when it comes on line in 2009. These relationships are shown in Graph 3 below, sourced from the Base Case demand forecast. Graph 3: Increaseof Annual Generationversus NT2Supply Thailand - 16000 14000 12000 10000 5 8000 6000 4000 2000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Year 10Increaseof GWhrea HNT2PE+SECl 1 This graph demonstrates that by the time of NT2 COD, the project will supply about one-half year of energy demand growth. NT2 would provide about 6 percent of the incremental energy requirement over 2009 to 2016. A.3 ElectricityDemandand Supply Forecast -Lao PDR 17. Lao PDR will be committed to buy up to 200 GWh of N T 2 energy, but may buy up to 300 GWh per year. Lao PDR's electricity supply system i s small and not integrated. There are four grids, none of which are interconnected. NT2 would serve the Central-2 grid (CR-2) around Thakek and Savannakhet, one of the two larger grids. 18. CR-2 demand i s expected to grow rapidly, giventhe small size of present consumption, the large scope for electrification, the big market for irrigation pumping (to replace unreliable and expensive Diesel pumps), plus air-conditioning, some industry, and government administration. ADB, IDA and Japan are the mainparties financing electrification. The Xe Pon gold and copper mine is in operation and will employ 1,600 people. It needs 305 GWhper year. In2003, energy consumption at end-use was 140 GWh and i s expected to be 320 GWh in 2010, excluding the mine, or 625 GWh, including the mine. The correspondingsupply requirements, including losses but without the Xe Pon mine, are 168 GWh in 2003, growing to 386 GWh by 2010. With the mine included, the 2010 energy requirement i s forecast to be 691 GWh. The anticipated supply program to meet this total energy requirement i s expected to be: A 120 Source Supply377 (GWh) Theun Hinboun Power Co. Thus, NT2's minimumtake obligation i s expected to be fully absorbed soon after COD, reaching the maximum allocation of 300 GWh. A.4 Least Cost Analysis Thailand 19. Thailand can generate electricity from a range of generation technologies and primary energy types: NT2, oil-fired steam, coal-fired steam, gas turbines (GTs) and CCGTs burning natural gas, and renewable energies such as biomass, wind, solar and mini hydro. According to EGAT, these renewable energy forms will play a positive but very small role in the total generation mix because of their high cost, and for some of them - limited availability. There are pilot projects using biomass - rice husks, sugar cane, etc. Based on discussion with EGAT the biomass potential that can be supported from the annual availability of raw material i s about 700 MW. The biomass potential i s small relative to annual load growth, and the generating cost i s about THB 3/kWh (over US cents 7/kWh, based on an EGAT pilot project); this cost i s close to the end-user tariff, hence uneconomic at the bulk power level. B y 2004, Thailand will have the largest solar project in the region - a 500 kW solar cell, producing at THB 12/kWh (US cents 3O/kWh). Thailand i s a low velocity area for windmills, and cost i s high: about THB lO/kWh. EGAT i s looking for geothermal resources, but so far the potential seems very limited. EGAT expects renewable energy to grow from 37 MW in 2002 to 197 MW by 2006. Government policy requires that 5 percent of incremental supply within the current plan period be renewable energy.7 Based on incremental capacity requirements to 2010 of about 5,900 MW, this would call for roughly 300 MW of such plants by 2010, consistent with the estimate for firm capacity from renewables as reported in the Danish Management Consulting study. The power system modeling for this appraisal includes the scheduled 197 MW. The additional 103 MW that may be developed by 2010 may be important for the country's renewable energy development, but would have no measurable impact on the results concerning N T 2 reported here. 20. Using conventional screening curve methodology, Graph 4 shows comparative economic costs for the most prominent large-scale generation options available to Thailand. A screening curve shows the cost per kWh of a generation plant at a range of capacity utilization rates (or CU rates). Hence, in Graph 4, CU rates are along the horizontal axis ranging from 10 percent to 90 percent and cost per kWh i s on the vertical axis ranging from 0 US cents to 18 US cents per kWh. Each technology has a curve, any point of which shows the cost per kWh at the ' The Danish Energy Management Study (footnote 7) indicates that the scope for firm capacity from renewable energy projects may be about 300 MW over the remainder of the decade. A 121 corresponding C U rate. For example, at a 10 percent C U rate, the curve with diamond symbols (for CCGT plant) indicates that the cost per kWh would be about 12 US cents, but drops to about 7 U S cents at 20 percent CU. This happens because the same fixed capacity and non-fuel cost covers twice the amount of energy production. Comparing screening curves between technologies shows which one i s least cost at any point in the C U range. NT2's average annual plant factor would be about 0.6, hence this i s the appropriate plant factor at which to compare its costs with those of other plants at various plant factors. Graph 4: Screening Curve Analysis-Thailand ScreeningCurves LIFE COST ".""" n nnn 1 , I 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 Plantfactor 1 +-CCGT +NT2 +GT *Oil -+Coal 1 - A I B I C I D E 1 F I G I H I I - 11 INPUTS SUMMARY - ECONOMIC 12 Disc rate Plant life INV $/kW FOM SlkW VOM $kwh Fuel $/mmbtu btu/kWh - 13 CCGT 0.10 25 510.15 18 0.007 natgas 2.27 7000 - - 14 NT2 0.10 50 939.63 17.6 0 - - 15 GT 0.10 15 310.00 10.46 0.0042 DDO 6.30 10500 16 Oil 0.10 30 792.00 19.56 0.0026 HFO 3.70 8870 17 Coal 0.10 30 1100.00 24.49 0.00298 Coal 1.60 9560 22. The interesting observations about these curves are: Single-cycle gas turbine and oil based thermal-steam capacity are generally more .. expensive than the other options at most C U rates, while coal could come close to competing with CCGT plant at very highC U rates;8 NT2 i s least-cost upward of about 30 percent CU. NT2 will operate at about 60 percent CU; and Given the high system load factor, relatively little capacity operates below a 30 percent C U rate. This screening indicates that under usual operating conditions, NT2 should be the least-cost solution, followed by CCGT plant. 23. The costs underlying these screening curves are the same data used in the cost-risk analysis described below. The E&S costs for NT2 included in the above comparison are those that the project will 'pay, as identified in the sponsor's financial model. They are about US$9 million (present-value) higher than the estimated economic values of the E&S impacts. 24. NT2's E&S impacts include the economic costs of mitigation, and the estimated economic values of residual impacts for which miti ation i s inadequate or not possible. A separate study was undertaken to measure these impacts. The present value of E&S impacts that it was able to F calculate i s slightly below the present value of E&S-related costs that the NT2 project i s scheduled to pay to parties in Lao PDR. For caution, the analyses presented in this PAD include for E&S costs the higher scheduled project payout estimates rather than the estimated economic values. As no such studies were undertaken for the non-NT2 electricity generation alternatives, no E&S costs are attributed to the non-NT2 technologies - such as gas, oil or coal-based generation. To that extent, this difference in treatment moderately biases the "least-cost" analysis against the NT2 project. Lao PDR 25. Lao PDR has several power supply options for the CR-2 region: additional imports from Thailand, NT2 and the smaller (75 MW) Xe Pon hydropower project in the southern part of Savannakhet Province, and Diesel generators. 26. NT2 as the Least-Cost Option. Based the Lao PSDP, NT2 is the least-cost option for serving the CR-2 load." The Lao PSDP provides the following supporting evidence. There are only two feasible hydropower resources for meeting the power needs of CR-2: (i) NT-2 and (ii) Xe Pon (75MW), located at the extreme southern end of Savannakhet Province. Xe Pon has a relatively low ranking among domestic hydropower developments, and presumably would be developed at a much later date. CR-2 topography i s not conducive to mini-hydro development. * GT capacity inThailand uses Diesel fuel, becausethe plants are remote from gas supply and operate very little. The coal result depends on a long-term projection of coal prices of about US$34/tonne, which may be low. Benoit Laplante, "Economic Analysis of the Environmental and Social Impacts of the Nam Theun 2 Hydroelectricity Power Project," February, 2005. lo Maunsell in association with Lahmeyer International: "Power System Development Plan For Lao PDR, August 2004" A 123 The only other generation source would be local diesel generator sets whose generation costs would be inthe range of US cents 12-20/kWh, depending on size and location. 27. Zmports from Thailand. The CR-2 could also receive additional power imports from Thailand. Currently there are three 22 kV interconnection points - at Pakxan, Thakek and Mukdhan. There are plans for strengthening the interconnections. The commercial cost of Thai- suppliedelectricity is about US cents 5.7/kWh. 28. By comparison, the utilization of NT2 energy inthe CR-2 Gridwould require construction of the following 115 kV lines from the Thakek substation: Line Length (km) Cost (US$ million) Thakek-Pakxan 185 18.65 Thakek-Pakbo 93 9.37 Total 278 28.02 29. An estimate of the cost that EDL would incur for utilization of 275 GWh from NT2 at its main substations i s as follows: Levelized Energy Purchase at Thakek US cents 3.58/kWh Levelized Transmission cost at 10percent discount rate US cents l.lO/kWh Total US cents 4.78lkWh The costs of downstream distribution (common to all generation options) are not included. A.4 Economic Cost-risk Analysis 30. Under the base case conditions discussed above regarding the cost of NT2, the cost of competing technologies and the demand forecast, extensive power system modeling analysis demonstrates that NT2 has a Net Present Value (NPV) of US$266 million relative to the most economic non-NT2 alternative (for the most part CCGT plants). The accounting of this NPV i s carried for the period 2004 to 2034, when the PPA expires." Of course, over this long period of time, there could be substantial departures from base case assumptions for the key factors influencing the NPV of NT2. Therefore, a probabilistic "Cost-Risk" analysis was implemented to test the implications of alternative assumptions for these key factors. 31. The purpose of this analysis i s to test whether a decision to implement NT2 now for an expected COD of November 2009 (the "NT2 Option"), versus not implementing it, i s robust to a range o f alternative outcomes for the key factors that could change inthe future and would affect the NPV of the NT2 option. The perspective i s that once the PPA i s signed, a series of commitments with onerous penalties for non-fulfillment makes it very difficult to alter the COD. The same applies to other plant that EGAT has defined as firmly committed. However, other planned additions are insufficiently committed and far enough into the future that there i s time to bothrecognize the need for altering their CODs andfeasibility to do so. " NT2 will have on-going value thereafter, but it is very far off to make a large difference to NPV and the specific utilization arrangements and comparators are too uncertain to be modeled with any confidence. A 124 32. The three factors which could have the biggest impact on the NPV of the NT2 option are NT2 project costs,12 the demand forecast and the value of natural gas.13 The lower the project cost, the higher the demand forecast and the higher the value of natural gas, the more economic would be NT2. Higher demand favors NT2 because the up-take of its energy output would be faster and without NT2 there would need to be a higher rate of investment in alternative, more expensive plant. Higher gas prices favor NT2 because it i s a hydro project displacing the need for an annual amount of natural gas corresponding to its energy production. The converse of these considerations also holds, and the values for all three risk factors could well vary above or below the values assumed for the base case. The cost-risk analysis recognizes that the values of these key risk factors are essentially uncorrelated and any combination of higher and lower values between them could occur, but no one knows which will actually occur. Thus, the NT2 option would be exercised knowing this uncertainty. The objective i s to determine whether the option has a positive NPV (at a 10 percent discount rate) relative to the alternative decision to not build the project, taking all the tested risk values for these factors and their probabilities of occurrence (PO) into account. 33. The PO of any one combination of these factors depends on the number of possible combinations of the factors and the individual POs assigned to the high, base and low values for each factor. The resulting structure of the complete cost-risk matrix i s shown in Table 3. The base case factors are supposed to have "expected values," therefore each i s assigned a PO of 50 percent (0.5). The base case project cost PO, times the base case demand forecast PO, times the base case fuel price PO has a base case PO o f 0.5*0.5*0.5 = 0.125 (Table 3, row 17). Thus, in this analysis, the base case has a PO of 12.5 percent, and all departures from the base case values for these key factors a combined PO of 87.5 percent. A combination of base case project cost (PO = 0.5) but low natural gas price (PO = 0.25) and low demand forecast (PO = 0.25) has a case PO of 0.5*0.25*0.25 = 0.03125, or 3.125 percent (row 21). The POs of all cases must sum to 1.0for each option (Le. the option to build or not to buildNT2). 34. The POs and the extent to which high and low values of the tested factors vary from their base case values are related. Small variances would normally have much higher POs than very large ones, provided the base case values have been realistically established. For this project, it i s not useful to test for small variances because they would have very little impact on the value of the option, given the size and flexibility of the EGAT system and the comparative generation costs described above. Extremely large variances from base values would have very low POs, and correspondingly less importance as decision factors. l2 Project cost is of economic interest because a formal economic benefit:cost analysis focuses on real resource costs and the efficiency o f resource use, without consideration of who benefits or suffers from project cost saving or cost over-run - a distributional rather than an economic question. l3 Future CCGT capital costs are also uncertain, but the probable range and impact are considered low. A 125 Table 3: Structureof the CompleteCost-RiskMatrix [A] Present Values ConstructionCost Value Probability hmm 0.06250 m 0.50 m 0.50 m 0.50 m 0.50 mmh 0.06250 m 0.50 mmm 0.12500 m 0.50 m 0.50 m 0.50 m 0.50 I 0.25 I 0.25 I 0.25 I 0.25 I 0.25 I 0.25 I 0.25 I 0.25 I 0.25 ote: The PO of each value assumption is shown inside its respective cell. "MEDIUM" = base case. 35. The POs and the variance at those POs are selected for this project based on two considerations: (i)experience of how the values of key factors have varied from expected values in other relevant situations; and (ii)the POs should neither over-weigh nor extingaish the expected (base) case. For example, using a 33.3 percent PO for each of the base, high and low values has the unusual implication that all outcomes are equally likely, while using 60 percent, A 126 20 percent and 20 percent, respectively could imply over-confidence in the base case and insufficient importance to the variances there from. We have selected a 50 percent PO for base case values and a 25 percent PO each for the high and low values. The variance of each tested factor i s related to those POs. 36. World Bank research on the experience of hydropower project investment costs suggests that a range of plus or minus 30 percent around the base case estimate i s valid at 25 percent PO, and it i s this consideration that determined the project cost range used in this cost-risk matrix.14 37. Demandforecasting experience inThailand and elsewhere suggests that at 25 percent PO, demand can be as much as 25 percentage points above or below the estimate by the tenth year into the forecast, and it i s this consideration that determined the departures from base case conditions for this cost-risk matrix in respect of demand performance.l5Electricity demand forecasts are uncertain. While the forecasting techniques may be very good, the demand for electricity i s a derived demand, the underlying determinants of which are hard to predict (e.g., GDP growth, personal disposable income, household formation, commercial and industrial investment activity, and technical change). EGAT has flexibility to reschedule some planned capacity additions. A low demand forecast, 25 percentage points below the base case, results in demand growth of only 3.4 percent per year from 2002 onward. This in turn would imply extremely low economic growth - in fact stagnant per capita GDP- sustained over a long period of time. This i s considered an unlikely occurrence in light of past experience over many years, save for the rather unique episode of the Asian financial crisis. However, in these conditions, the "committed capacity additions" and life-extension of old plants would have carried the system until 2013, at which point, a deficit of 222 MW would open, growing to 1,159 MW by the next year. Clearly, in those conditions, NT2 commissioning in 2009 would have been sub-optimal; its economic consequences are tested along with other uncertain factors, as described below. 38. The levels and variance of the value of naturalgas under Thai conditions depends mainly on uncertainties about future sourcing having different cost profiles, international values of alternative fuels and the demand forecast for natural gas. The base case and lower probability cost estimates above and below the base values are stated below. The valuation basis was developed from a combination of World Bank oil price forecasts, contracting practices in the region that define mutually agreed valuation between buyers and sellers of gas and other proprietary information that natural gas producers and users in Thailand provided to the Bank, with understandings on confidentiality. The economic gas values in this table are well below commercial values for several reasons. Firstly, being economic resource costs, they exclude transfers (income taxes and royalties) on the Thai portion o f the gas supply. Secondly, economic pipeline tolls are well below commercial tolls, because the economic marginal cost of gas pipeline transportation i s limited to recurrent operating cost - the capital charge component for l4 See: Bacon, Robert W., Besant-Jones, John E., Heidarian, Jamshid: Estimating Construction Costs and Schedules: Experience with Power Generation Projects in Developing Countries. World Bank Technical Paper No. 325, Energy Series, 1996., and Besant-Jones, John E. "Assigning Probabilities to Scenarios for Risk Analysis - The Case of Hydropower Project Construction Costs, World Bank, May 2003. l5 See: Besant-Jones, Sanghvi, and Vernstrom: Review and Evaluation of Historic Electricity Forecasting Experience (1960-1985),World Bank Industry and Energy Department Working Paper - Energy Series Paper No. 18. June 1989. A 127 Assumption BaseCase Low Case HighCase NT2project cost (US$mm)a 1,005 704 1,307 Natural gas (US$/mmbtu) 2.27 1.99 2.57 Demand Growth (%/year) 6.1 3.4 8.7 42. Based on the twelve cases modeled (Table 5), the end result i s that the NT2 option has a base case PV saving of US$266 million, a minimum 86 percent probability of achieving a lower NPV cost than its natural gas-based alternative, and only an 11 percent probability of not achieving it. l6 Ideally one would calculate the entire matrix and emerge with one probabilistic value of the project's worth, all risks considered. However, this would have required modeling more cases than essential to understand the real economic risk profile facing this project. A 128 Table5: ResultsofLeast-CostRiskAnalysis Economic - PV Savings (Economic)for the NT2Option(US$ million) Low Low Low 0.015 +151 43. The base case saving i s large relative to the US$682 million PV project cost. It i s also a robust result, because there i s only an aggregate 11 percent probability of a definite negative outcome for NT2. The base case was implemented with NT2 as a candidate (free-floating commissioning date determined by modeled optimization). The calculated optimum i s 2010, indicating that the proposed commissioning date (November 2009) i s appropriate. The analysis demonstrates that the economic merit of NT2 i s robust, insofar as only four of the twelve downside cases tested result in negative NPV for NT2. Of the four, one of them i s very close to break-even. Of the remaining three, the worst one (having a negative NPV of US$259 million) only has a 1.6 percent probability of occurrence. The remaining two are of lesser negative impact and each has only 3.1 percent probability of occurrence. AS CommercialCost-RiskAnalysis 44. A parallel cost-risk analysis, undertaken using ~ommercial'~rather than economic values, examines whether differences in valuation of key factors, such as the demand forecast and the price of natural gas, would lead to different conclusions about the merit of the project, and hence its commercial sustainability. The main difference between economic and commercial valuation for the project cost i s that in an economic analysis only the real resource cost of incremental project investment and operations i s included. However, in the commercial analysis the project cost i s the stream of PPA payments, which includes the recovery of sunk costs and taxes. As well, the rate of retum to equity may exceed the social discount rate for the country. The main valuation difference for natural gas i s that in an economic analysis only the economic value of the resource i s included as discussed above, whereas in a commercial analysis the natural gas price includes royalties, taxes and market-based pipeline tolls. The results of the commercial cost-risk analysis are shown here: l7 This valuation basis stands in contrast to the economic analysis. Inthe commercial analysis, the project benefit stream is the wholesale tariff the utilities pay to the NT2 project company, and power costs are limited to the commercial costs and RoR that the PPA tariff recovers (including sunk costs and taxes). A 129 Table 6: Resultsof Least-Cost RiskAnalysis Commercial - PV Savings (Commercial) for the NT2Option (US$ million) PPA Price Demand Forecast Gas Price Probability Savings (i) Base Base Base 0.250 +227 Base Base Low 0.125 +161 Base Low Base 0.125 -32 Base Low Low 0.063 -109 45. There i s no variation of the NT2 project cost in the commercial analysis, because the PPA payments are fixed by contract. It would require low probability adverse circumstances to be sustained over a long period of time for the NT2 PPA to be seen as an inferior option. Scenarios with high demand and high gas prices were not prepared because the results of Table 6 indicate they would all have positive NPV savings for NT2. Therefore the only potential negative outcomes for N T 2 are the two scenarios in Table 6 featuring a low demand forecast. The probabilities of occurrence for these scenarios are 6.3 and 12.5 percent, respectively. Overall, this means that from a commercial perspective NT2 has a minimum 81 percent probability of beingsustainable inrespect of the tested demand andnatural gas price conditions. A.6 Project Economic Rate of Return (ERR) 46. Once the least-cost analysis determines that the NT2 option fits as part of the least cost system expansion program, the next step i s to determine whether the project has an adequate ERR. Base Case ProjectERR Analytical Framework 47. The ERR analytical framework i s designed to find the ERR of a series of annual economic costs and benefits. Benefits consist of the value of project energy to end-users. Costs include constructing and operating the project, delivering the project's energy to end-users through transmission and distribution systems and managing E&S impacts." The latter are represented in the ERR calculation as a stream of E&S costs the project will pay according to the project financial model. The PV of this payment stream slightly exceeds the PV o f the estimated economic E&S costs they cover." The overall analytical framework may be visualized as shown inthis diagram, where the left box is benefits, the next two boxes are costs and the right box is the difference between benefits and costs: l8 The environmental and social management costs are those included in the sponsors' financial model as project costs. The PV of this payment stream slightly exceeds that o f the calculated economic E&S costs. l9 This i s discussed further below. As well, please see the report of Dr. Benoit Laplante cited above, which describes these calculations indetail. A 130 consumer WTP Distribution cost O&M and E&S value-added managementcost where: GWh = the amount of generated energy from NT2, Consumer WTP = the price for that volume that consumers are willing to pay, O&M =project operating andmaintenance costs E&S = environmental and social costs. 48. Theproject ERR (base case) is 16.3percent (tables tabulating the base case values for key input assumptions and for benefits, costs and the ERR results are provided below and overleaf, followed by explanation of the values used). The ERR result applies to the economic net benefit flow over a thirty-year period from start of construction to the end of the PPA. The E&S costs incurred during the investment period (2005 to 2009 inclusive) are included in the investment cost data of column K, while the E&S costs incurred during the project operational period from 2010 to 2034 are included in the operating cost data of column L.A major hydro project should have a longer benefit stream. While heavily discounted, its inclusion would increase the ERR moderately. The period beyond the 30thyear, however, i s not included because o f the uncertainty about off-take arrangements inThailand or Lao beyond the duration of the PPA. Assumptions 49. The following paragraphs describe the basic assumptions used inthe ERR analysis. Table7: SummaryTable of MainBenefitandCostAssumptions 1 Assumption 1 Value I Thai willingness to pay (price component) US cents 7/kWh primary energy (PE) ~ U S cents 2.3/kWh secondary energy (SE1) Lao willingness to pay (price component) US cents 6/kWh I Thai and Lao system losses I 7.1% and 16.9%, respectively Real Economic NT2 Project Cost US$1,005.4 million I1I Present Present value of E&S costs paidby project I US$63.8 million I I US$54.7 I Value of Estimated Economic E&S million Impacts THB value loss II 275 I I GWh at US cents 2.3/kWh, (incremental replacement cost inThailand). Sub-transmission and distribution costs I I Thailand US cents 1.04/kWh; Lao PDR US cents 4.4/kWh I A 131 Table8: ERR Results BaseCase - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 I:" I- A 132 50. Project benefits (Table 8, columns B to J) include the value of NT2 sales at the Primary Energy (PE) and Secondary Energy 1 (SEC1) tariffs to Thai and Lao electricity consumers.20 Sales at the Secondary Energy 2 (SEC2) tariff are excluded because the amounts are very uncertain and of low value.21The following paragraphs explain the derivation of end-user value and losses. 51. The price component of Thai consumer willingness to pay (WTP) estimates for PE for the MEA and PEA distribution systems individually and the two combined. WTP includes what customers actually paid for their electricity in 2004, i.e., revenue per kWh sold including value- added tax (7 percent), amounting to THB 2.81/kWh or US cents 7/kWh. This value does not include any estimate of ''consumer surplus" (i.e. the price times the quantities of energy that consumers would have been willing to use at prices above the tariff). As such, it moderately underestimates the potential true economic value of the benefit stream, and likewise the project ERR. The value for SE1is its energy displacement value in the EGAT production merit order, estimated at U S cents 2.3/kWh for fuel and variable O&M. Being secondary energy, it i s not serving incremental capacity and energy needs. Rather it displaces energy that would otherwise be produced from existing capacity serving existing demand. 52. Lao WTP i s U S cents 6/kWh in 2004, based on information from the recently completed Elektrowatt tariff study.22 53. To calculate System losses (Thailand)for transmission and distribution it i s necessary to reduce the benefits of NT2 energy production by losses, because all power systems have transmission and distribution losses between the power plant and points of end-use, reducing end-use consumption relative to generation. Thailand's loss rates (average of 7.1 percent for transmission and distribution) indicate a power system operating at very high technical and commercial efficiency.23 54. System losses (Lao PDR) are now about 17 percent, the split between technical and non- technical losses beingunknown. Elektrowatt maintains this loss factor over its planning period. 55. Total benefits are the sum of PE and SEC1, shown in Column J of Table 8. 56. Project investment costs are shown in column K.The source of all the raw cost data in this table, excluding the transmission line from the Thai border to the Thai grid, i s the version o f the sponsor's financial model from December 2004. Adding all of the individual components yields 2o Looking at "Benefits" in the Base Case Table, columns B and C are the expected annual sales of PE and SECl energy to EGAT (and likewise in columns D and E for sales within Lao PDR).The values of PE and SECl to Thailand are listed in columns F and G respectively. The formula for the PE benefits calculation is (GWhPE* (1-percent losses)*end-user value per unit). 21 The sponsors' financial model also excludes SEC2 for the same reasons. 22 "EDL Tariff Study Final Report," December 2004, Electrowatt-Ekono Ltd., Switzerland and Fichtner, Germany 23 Thailand has negligible non-technical losses and a fully commercial billing and collections profile. A 133 a nominal project cost of US$1,216.5 million.24The total includes the head contract, financing costs, development costs, insurance, and pre-commissioning operational, environmental, social andcontingency 57. Some adjustments are needed to convert the financial values in the financial model to economic values for use in an ERR calculation. Firstly, over US$250 million of IDC i s not explicitly accounted because the time value of the annual cash flow i s internalized in the ERR calculation. Secondly, US$7.5 million of NTPC's contribution to the GOL o f US$30 million i s excluded because it refunds sunk costs.26 Thirdly, US$85 million of pre-closure sunk development costs and financing contingency at sponsor risk are excluded. Fourthly, because the costs are in fixed-price contracts, but expended gradually over 54 months, it i s known that contractors included expected inflation in the contract prices that the cost data reflect. Therefore, it is necessary to convert the nominal costs to the project evaluation numeraire of real US$ (2004). This i s done usingthe World Bank's MUV index.27The economic project cost after these adjustments i s US$1,005.4 million, including US$135 million for the Thai portion of the NT2-associated transmission line. The adjustments from financial to economic project cost are shown inthe following summary table: 1.1 Developmental Pre-Op (incl. GoL contribution) 1.2 Head contract costs 1.3 Financing costs 261.0 check Total Financial Cost 1,216.5 1,216.5 2. Conversionto EconomicCost 2.1 delete financing costs 2.2 delete sunk costs & finance contingency from 1.1: 2.3 delete portion of GoL contribution Total nominal cost of economic items: 58. Generation-associated transmission in Lao PDR from the project to the grid i s included in the project investment cost. 59. Project Operations and Maintenance (O&M) costs, post-commissioning (column L) are from the sponsors' financial model. They include E&S management costs (area management, resettlement, monitoring and contingencies), NTPC administration and insurance costs, project operations and major maintenance. They are denominatedinUS$ andTHB, the two mainproject Since this work was completed the sponsors have increased the nominal project cost to about US$1250 million. It was neither possible, nor would it have been o f any consequence, to redo all o f the economic analyses for such a small change. Additional contingencies have been negotiated between NTPC and the lenders amounting to US$200 million, the purpose being to assure debt service inthe event o f about a one-year revenue lapse for whatever reason. We evaluate this risk by assuming a one-year absence of benefits after project commissioning, rather than adding this financial contingency to the project cost. Both these adjustments are standard methodology. This index i s applied to total economic costs denominated in US$ after the THB portion of costs i s converted to US$ at THB 40 per US$1. A 134 currencies. The THB costs are first converted to US$ at THB40 per U S Dollar. Aggregate nominal U S Dollar costs are then converted to real U S Dollars of 2004 using the MUV deflator. For the E&S component of O&M costs, being "harder" numbers, we have retained these expected project payout costs in the ERR calculation, although they are slightly higher than the calculated economic value of the associated impacts. Using either would not alter the ERR noticeably. 60. When NT2 i s commissioned, there will be a 275 GWh reduction o f firm export energy from the Theun Hinboun project. This i s valued at US cents 2.3/kWh, being the cost of replacing it with CCGT energy from existing capacity inThailand. 61. Thai distribution costs are based on a forward projection of distribution system Long Run Average Incremental Cost (LRAIC) in Thailand. MEA and PEA, the two Thai public sector distribution utilities, provided their projections of incremental energy sales and investment programs over 2002 to 2011and 2008, respectively.28To calculate the LRAIC of investment, the incremental sales volume i s stabilized at the value reached b y the end of the expansion program and accounted over the number of additional years needed to complete a roughly 35 year economic life cycle for the incremental investments. The nominal investment values over the expansion phase are deflated to real THB levels using a projected THB CPI deflator of 2.8 percent per year2' then converted to US$. A discount rate of 10 percent i s used to represent the social discount rate for Thailand. The present values of the annual investment program are divided by the present values of the incremental GWh sales to end-users for the two systems, yielding LRAIC of US cents 0.57/kWh. Recurrent operating costs of the incremental investments are based on the operational experience of 2001 plus a pro'ection of long-term real productivity improvement of 1.5 percent per year for the next ten years,$ resulting in a real value of US cents 0.45/kWh. Combining investment and operating costs, the LRAIC of distribution i s U S cents 1.04/kWh. This value i s multiplied by PE sales to end-users, resulting in total incremental distribution costs for NT2-associated sales. 62. Transmission and distribution costs within Lao PDR. For transmission, the nominal cost estimate of US$14 million per year for two years (provided by Lahmeyer) i s deflated to real dollars assuming transmission works would begin two years before project commissioning. We assume that operating costs of the transmission line would be 1percent of investment, and losses from the project to end-users 16.9 percent. Sales to the Lao system may range between 200 and 300 GWh per year, but we have used the sales stream committed in the PPA, which i s 200 GWh, then adjusted for losses. The PPA requires that 200 be supplied, but Lao has the option to take up to 300. 63. Estimates of LRAIC distribution costs (Lao PDR) are based on estimates which Elektrowatt developed in the tariff study for region CR-2, where NT2 energy will be absorbed. All of this data was re-verified with the utility's up-dated planning data for 2004-2011, based on a higher demand forecast. The results in terms o f cost per kWh are extremely close, however the earlier series is retained, because it reflects the demand forecast inthis study and results invery slightly higher unit cost. 29 Based on experience from 1997 to 2001. 30 The regulation of distribution tariffs includes an RPI-Xformula. The actual values for X over the next ten years are not known. However, an assumption of 1.5 percent per year real productivity improvement over the next ten years is reasonable, especially in light of the scope for operational efficiency improvement being considered in the context of further sector reforms under discussion. A 135 Combining the per kWh end-use cost of incremental transmission and distribution, the total i s U S cents 4.4/kWh. 64. Environmental and social costs are maintained as those expended according to the incremental cost data in the sponsors' financial model, it being shown in the above summary table of input assumptions that the accounted economic E&S are about US$9million (PV) lower than the planned project outlays. Thus, this analysis retains the higher cost valuation. Please see the Section at the end of this Annex for an expanded summary discussion o f environmental and social costs. 65. Total costs (ERR Base Case Table Column P) are the sum of project investment, O&M, transmission and distribution costs per year from 2004 to 2034. 66. Net benefit per year (ERR Base Case Table Column Q) i s the difference between total benefits (Column J) and total costs (Column P). The ERR to the net benefit stream in the base case is 16.3 percent (real). SensitivityAnalysis 67. Sertsitivity tests are conducted to evaluate the impact on the ERR of project delay, cost over-run, low demand (the Thai system low load growth rate assumed in the cost-risk analysis), hydrological distress in 2010 and 2011 equivalent to the worst two hydrological years on record (notwithstanding sponsor assurance of near-certainty that the reservoir will be filled before commissioning), and various combinations of these adverse circumstances. The one-year delay scenario i s portrayed as a situation in which the sponsors have committed to the financing and the contracts on the original project schedule, but there i s a twelve- month delay in the project commissioning date, resulting in zero benefits for that twelve months. The two-year delay scenario includes a reshaping of the cash flow by spreading it proportionately over the construction period such that the same total i s fully expended at the end of an additional two years. 68. Cost over-run i s tested for: (i)a total over-run of 10 percent proportioned over the original cash flow distribution of the N T 2 investment stream; and (ii) 30 percent cost over-run. The a impacts of these tests are shown notwithstanding that the base project cost already includes a contingency ("risk premium" in the head contract), it also being likely that the estimated costs of the subcontracts include contractor contingencies (of unknown amounts) because they will be lump sum, time bound, fixed price contracts, with exceptional provisions as negotiated between NTPC andthe subcontractors. A 136 69. A summary of the ERRresults i s as follows: Table 10: ERR Results -Base Case and Sensitivity Tests Scenario ERR I Notes 1. Base Case 16.3% IPlanned commissioning date, basecase costs 2. Returnsdelayed one year 14.6% Base case investment,but one year commissioning delay 3. 10% Project Cost Over-run 15.1% Economiccosts increased pro-rata 10% in each year 4. Cases 2 & 3 combined 13.5% 5. Low Demand 12.8% 2010 commissioning, but secondary energy value for 3 years 6. Case 5 & 30% cost over-run 10.5% 7. Two year delay 13.8% Re-shapingof investment cash flow; no PPA extension 8. Case 7 & 30% cost over-run 11.1% 9. Two driest years 15.7% Base case with reducedenergy 2010, 2011 (per NTPC) The worst case scenario, combining low demand growth with a 30 percent cost over-run still does not bringthe ERR below 10percent. A.7 Summary: Economic Value of Environmental and Social Impacts 70. Environmental and social impacts of the project differ significantly across the various impacted areas o f the project. 71. I n the Nam Theun River basin (downstream of the Nakai dam), impacts are expected to be limited to the loss of fisheries (resulting from a reduction in water flow). Estimates of aggregate fisheries loss range from US$0.73 to US$1.30 million PV. These losses are expected to be fully mitigated by the project. The estimated cost of this mitigation program i s expected to range between US$0.8 and US$1.6 million PV (depending on the timing of program implementation). N o additional adverse impacts are expected on human-related use of the water of the Nam Theun River. Species recordedon the transects of the Nam Theun River are common in the surrounding forest environment, and the riparian vegetation of the Nam Theun River is commonly recorded over a wide geographic scale of the Nam Theun River basin. However, one notable exception to the above observation i s the Big-headed Turtle (Platystemon magacephalum) which has thus far been observed only within the river valley and whose existence may be threatened by the reduction inwater flow. 72. The Nukai Nam Theun NPA i s nationally and internationally recognized as one of the most important biodiversity sites in Southeast Asia. The protected area i s currently under severe stress as a result of both legal and illegal activities. It has also been recognized that the current rate of harvesting of high value products i s unsustainable, and that the wildlife and biodiversity are under serious threat. Within the protected area itself currently live approximately 1,200 households (about 5,800 people) with an average level o f total annual household income of approximately US$400. 73. The commitment of US$1 million per year for protection and management of the NT2 watershed for the duration of the concession agreement b y NTPC i s expected to generate key positive benefits, including improving natural resources management, protecting and conserving the habitat and biodiversity of the NNTNPA, improving the livelihood of its inhabitants, contributing to poverty alleviation (it i s estimated that the project will reduce poverty by up to 35 percent in the NPA), and preserving the ethnic diversity found in the NNTNPA. Set against scenarios whereby logging activities in the NPA would intensify, the benefits of maintaining the A 137 carbon sequestration services of the NPA are estimated between US$10 to US$20 million PV. None of these benefits are expected to be realizedinthe absence of the project. 74. Theflooding of the Nakai PZateau entails both local and global costs and benefits. The project, through its livelihood program will significantly contribute to poverty alleviation for the resettlers by doubling the expected present value of aggregate income (from US$5 to US$10 million PV), and by completely alleviating poverty of the resettlers (as measured against the Lao poverty line). The project will further significantly increase access to improved health care and education facilities, water supply, sanitation, andelectricity. 75. Green-house Gas Emissions (GHG). The project i s expected to reduce emissions of GHG by approximately 20 million tons over the horizon of the analysis (avoided emissions of 50 million tons compared to CCGT partially offset by an estimated 30 millions tons of emissions from the reservoir itself). Net benefits from reduced GHG emissions are estimated between US$4 and US$16 million PV depending on the timing o f the release of GHGfrom the reservoir. 76. WiZdZve and biodiversity. Existing information does not support the notion that the impacted area (Nakai Plateau and resettlement area) i s of high biodiversity value. The white winged duck may benefit from the project as the impoundment of the plateau will lead to an expansion of forested wetlands. The habitat of the Asian elephants i s expected to be adversely impacted by the project, though not to the point of threateningthe viability of the elephants inthe area. For both of these species, conservation programs will be put in place b y the project to facilitate their adaptation to the new environment. 77. TheXe Bang Fai River basin will experience bothpositive andnegativeimpacts. Adverse impacts include mainly loss of fisheries, the loss of river bank gardens, and the loss of assets including potentially cultural sites. The largest of these adverse impacts pertain to the loss of fisheries income (cash and imputed) estimated at approximately US$4 million PV. The lower XBF may also experience additional flooding which may significantly impact productive rice yield. Estimated expected loss may reach US$3 million PV. All known adverse impacts of the project are expected to be completely mitigated or compensated for through the implementation of a program that will offer riparian inhabitants with alternative livelihood options, and the relocation of all productive andphysical assets. 78. TheMekong River, including Cambodia's Great Lake (the Tonle Sap) and floodplains are not expected to experience any significant impact. This analysis i s covered in the Cumulative Impact Assessment (CIA) prepared for the project. 79. Znduced impacts are expected to be significantly positive, especially the increased potential for irrigated agriculture in the XBF River basin, and additional tourism activities in the area o f the reservoir. Estimates show potential revenues in the order of US$4 to 6 million PV over the lifetime of the project. A 138 B. Financial Analysis 80. NTPC will be a privately owned and operated company established to develop, construct and operate the Nam Theun 2 Hydroelectric Project. Construction financing for the proposed project i s expected to be mobilized on a limited recourse basis and will be fully committed at financial close. NTPC will install and maintain an accounting and cost control system, management information system and books of account and other records in conformity with internationally accepted accounting principles. NTPC's performance will be monitored, inter alia, through regular reports and the review of audited annual accounts. 81. NTPC's main financial objective will be to earn a competitive rate of return for its shareholders, which will depend upon NTPC's ability to construct, complete and commission the dam, powerhouse and transmission facilities on time and within budget, and to ensure efficient operations and maintenance of the hydropower station. NTPC will have two sources of revenue from the sale of electricity: (i) to EGAT under the EGAT PPA; and (ii) EDL under the EDL to PPA. Project Capital Costs 82. The total estimated base project cost borne by NTPC, including all development costs, construction costs and financing costs i s expected to be about US$l,250 million, expressed in current prices. Pre-operating costs include project development costs incurred by the sponsors, environmental and social costs, a US$30 million NTPC payment to GOL under Schedule 19.1 of the Concession Agreement, the cost of GOL works, operating and maintenance pre-operating expenses, NTPC general and administrative expenses incurred during the construction period, and insurance. Construction costs consist entirely of the cost of the Head Construction Contract (HCC), under which the construction of the power house, dam and all associated infrastructure, and the supply and erection of all power generation equipment and transmission lines will be undertaken. The HCC i s a turnkey, price-capped contract, limiting NTPC's construction risks associated with the project, except for about US$16 million of underground tunnel works wherein the geological risks are shared between the HCC and the company. For the purposes of the financial analysis, the project cost includes only those costs incurred directly by NTPC. Therefore, the costs to EGAT associated with the construction of the transmission line and associated facilities in Thailand and the costs borne by the private sponsors (and not reimbursed by the project) are excluded. Table 1provides a breakdown of base project costs. A 139 r Table 1: BaseProject Costs Cost Category US$ Million THB Million TOTAL US$" Equivalent (@ THB 40: 1US$)* 1I Development Costs 72.20 80.00 1 74.20 Environmental/ Social Costs II 48.78 48.78 I GOL Contribution (under clause 19.1of the ConcessionAgreement)l 29.20 1II -- II 29.20 III O&M Re-OperatingExpenses 10.65 68.50 12.36 NTPC General& Administrative 29.58 161.36 33.62 Bonding/ Financingcost 17.06 17.06 Insurance 13.07 13.07 Contingencies 21.00 516.00 33.90 Working Capital 5.99 252.51 12.30 GOLWorks 3.00 3.00 TotalPre-Operaiing Costs 250.54 1,078.40 277.50 IIIHead ConstructionContract / NTPC Works 401.01 12,846.50 722.17 --1 TotalCosts 651.55 13,924.90 999.67 I Interestduring Construction(IDC) andOther Costs III 143.54 III 4,271.46 III 250.33 II TOTAL BASEPROJECT COSTS I 795.48 I 18,179.64 1,250.00 Operatingand Maintenance Costs 83. Operating and maintenance (O&M) costs are projected on an annual basis according to six categories of expenses: (i) environmental and social costs; (ii) administration costs; NTPC (iii)NTPC operator fee; (iv) owner direct cost; (v) insurance; and (vi) major maintenance. Environmental and social costs include projected expenditures on catchment area management, resettlement, monitoring and mitigation, as well as a physical contingency allowance. NTPC administration costs include expenditures on NTPC staff, office management and travel. The NTPC operator fee covers direct expenditures b y the company on facility operations. Insurance expense i s for coverage against machinery breakdown and damage, business interruption and third party liability. Major maintenance i s intended to cover the cost of two overhauls of each turbine. One turbine i s overhauled each year over the four-year period beginning in Year 9 o f operations. The second overhaul cycle i s undertaken beginning in Year 22. Annual O&M costs, including those related to environmental mitigation, and major maintenance costs are projected to range from a low of US$18.5 million to a high of US$41million. Electricity Sales 84. Electricity sales are projected to be the minimum guaranteed generating capacity to be made available to the Electricity Generating Authority of Thailand (EGAT) and ElectricitC du Laos (EDL), as set out in the PPA with each of these entities. Only sales made during the commercial operating period are included in the financial analysis. Therefore, any sales made during the project commissioning period prior to full commercial operations are not included. Further, it i s assumed that no SE2 electricity i s being generated by the project (see discussion below on tariffs for SE2 electricity). Needless to say, if the project were supplying SE2 power to EGAT, additional revenues would be generated. A 140 Electricity Tarqfs 85. Electricity tariffs are fixed by the PPAs for each year over the respective agreement period, and are set in a combination of US$ and THB. Under the EGAT PPA, separate tariffs have been established for each category of energy: (i)Primary Energy (PE); (ii) Secondary Energy 1(SEI); and Secondary Energy 2 (SE2). PE i s the energy NTPC delivers between 6 am and 10 pm, from Monday to Saturday, inclusive. SE1is the energy NTPC delivers at any other time. SE2 i s energy dispatched inexcess of that allocated to PEand SE1. 86. The tariffs applicable to sales to EDL differ from those for EGAT. On a levelized basis, the tariff to GOL i s expected to be about US$ 3.87/kWh (this tariff i s lower than the tariff charged to EGAT under the EGAT PPA). Project Revenues 87. Project revenues are derived entirely from the sale of electricity under the two PPAs. Gross revenues to the project company are the total electricity sales in each tariff group multiplied b y the applicable tariff in each year over the concession period. Inthe base case, it i s expected that the project will generate about US$6,129 million based on sales of PE and SE1 Energy under the EGAT and EDLPPAs.For the purposes of this analysis, SE2 Energy to EGAT i s assumed to be zero (in practice it i s likely that the project will generate SE2 energy). WeightedAverage Cost of Capital 88. The Weighted Average Cost of Capital for the project (for NTPC) i s estimated to be 9.76 percent for the base financing (WACC i s the weighted average of the estimated cost of equity and debt comprising the NTPC capital str~cture).~~ The weighting of debt and equity i s 72 percent and 28 percent, respectively which i s the planned capital structure for NTPC for the purposes of base project financing. Contingent financing, if needed, will be provided equally as debt and equity. Cash Flow Utilization 89. As with normal project finance operations, gross revenues arising out of the sale of electricity to EGAT and EDL will be applied to fund project expenses in the following order of priority: O & M expenses, GOL resource usage charges (royalties), income taxes, debt service payments, debt service reserve; any remaining cash flow will be transferred to the shareholders on NTPC as dividendsa3*The following chart provides an overview of the cash flow ~ t i l i z a t i o n . ~ ~ 31 Based on the Lenders Financial Model, dated February 2005. This financial model may be modified to reflect any change in the financing assumption prior to Financial Close of the project. 32 This cash flow waterfall has been reviewed and confirmed, as a part of the preparation of the project, based on the contractual documentation and the financial model prepared by the commercial lenders as well as the sponsors. 33 The peaks in the chart denote the release o f various reserves that the company is holding for debt service and major maintenance. A 141 C a sh flo w U tilisa t i o n 1 8 0 , 0 0 0 in ' 0 0 0 U S D 1 6 0 , 0 0 0 1I 1 4 0 , 0 0 0 1 2 0 , 0 0 0 ~~~ L 1 0 0 , 0 0 0 -E--- ~ 8 0 , 0 0 0 - 6 0 ,O 0 0 4 0 , 0 0 0 2 0 , 0 0 0 m D e b t S e r v i c e l O & M C o s t s = T a x & R o y a l t i e s iZ2D IVid e n d s - N e t D S R A P a y m e n t = R e l e a s e f r o m D S R A Terminal Valueof the NT2 Facility 90. At the end of the concession in 2034, the project assets will be transferred by NTPC to GOL at no cost to GOL. Given that the economic life of the assets should extend well beyond 2034, GOL could then use the facility to generate power for consumption within Lao and/or for sale to Thailand or other nearby countries. Therefore, the project should generate net cash flows to GOL beyond the end of the concession. This terminal value could be estimated as the NPV of these cash flows over the remaining operating life of the project. Given that the use and value of the power over this post-concession period are uncertain, the terminal value i s conservatively assumed to be zero. Debt Service Ability of the Project 91. The financial analysis also shows that reasonable senior debt service cover ratios are achieved by the project. Inthe base case scenario, the minimum debt service cover ratio (DSCR) i s 1.48, the weighted average DSCR i s 1.58 and the average DSCR i s 1.68, which are reasonable from a project finance perspective. The project cash flow also achieves a minimum Loan Life Cover Ratio of 1.66. Keeping in view the difficult commercial financing prospects for the project, the industry practice i s to have a minimum DSCR of higher than 1.4 at all times. Therefore, it should be noted that the project i s not cash-rich and that the project financial and contractual structure i s close to optimization as far as the cash flow waterfall and project costs are concerned.34The charts below provide an overview of the available cash flow to provide debt service. 34 The annualized Debt Service Cover Ratio has been calculated using the Net Operating Cash Flow (NOCF) in two consecutive six-month periods divided by the amount o f debt service over these two periods. NOCF i s calculated after operating costs, usage royalty and income tax. The debt service cost is based upon repayment assumptions made by NTPC. A 142 DSCR profile x times Debt Service profile 120,000 in `000 USD 100,000 80,000 60,000 40,000 20,000 Project Financial Analysis 92. Financial analysis of the project has been undertaken to assess the financial viability of the proposed project from the perspective of NTPC, and specifically of the project shareholders, including the GOL.35For the operating entity, viability i s assessed on the basis of the project financial internal rate of return (FIRR) and project's financial net present value (FNPV), which measures the overall return on capital generated by the project over its economically useful life. Financial viability to shareholders i s measured on the basis of the FIRR of equity invested in the 35 The basis of the financial analysis i s the Lender's Financial Model, dated February 2005 A 143 project, as well as the FNPV to the shareholders, which indicates the overall return on equity over the project life. 93. Based on these analyses, the project appears to be financially viable, both from the overall perspective of the project as a whole, to the GOL, and to the other equity holders. However, overall project viability, as well as equity returns to shareholders, i s relatively sensitive to adverse changes in key variables. To assess the potential impact of changes in these variables, a sensitivity analysis has been undertaken in which the FIRWNPVs are calculated under a range of adverse scenarios (see below for details). 94. From the total gross revenues of about US$6,129 million which the project i s estimated to generate over the 25-year concession period, about US$626 million will be spent by NTPC on operations and maintenance of the plant. Another US$1,400 million will go to debt service payments (principal and interest) to the commercial banks and other direct lenders to the project. The GOL will receive about US$1,222 million from the project as resource usage charges (US$784 million) and income taxes (US$439 million). The remaining cash flow o f about US$2,834 million i s expected to be transferred to the shareholders of NTPC as dividends. 36 The GOL will receive about US$709 million as dividends from NTPC for its 25 percent shareholding inthe company and about US$29.2 million as a contribution from NTPC at Financial Close (see the following chart and the discussion on GOL revenues below). Distibution of Project Gross Revenues Operating Expenses Dividends to 10o/o Private Sponso 35O/o Debt Service Payments Dividends 12Yo Income Taxes Charge 7o/o 13Yo 95. The project as a whole generates a total present value of returns37(cash flow before debt service and before any taxes) of about US$1,289 million, of which the GOL i s expected to receive about US$329 million (26 percent, before deducting repayment o f any debt it incurs to 36 Other than operating expenditures for the plant, there are other financing expenses such as fees paid by the company to guarantors, insurers and WC providers, which have also beendeducted. 37 Present Values and Net Present Values are calculated at the WACC. The pre-completion Weighted Average Cost of Capital (WACC) for the project i s expected to be 9.76 percent, based on the calculated rate o f return on equity. A 144 finance its equity contributions to the project). The private sponsors are expected to receive about US$397 million (31 percent of the financial returns). The remaining cash flow i s primarily used to pay for commercial debt service. 96. This sharing of financial benefits accruing to the various participants seems reasonable -consideringproject's commercial risk, including up-front completion and delay risk, is being that GOL i s only a 25 percent equity partner, and that almost all of this large capital intensive allocated to project sponsors and/or other parties, including the G O L among the shareholders). 97. The financial net present value (FNPV) of the project (as a whole) is expected to be US$235 million (calculated with total project investment costs of US$1,250 million, gross revenues arising out of the EGAT PPA, expected operating costs and prior to payment of debt service for the life of the concession). This analysis has been undertaken from the perspective of the project as a whole and not from the perspective o f the equity providers and, therefore, includes all capital costs andnotjust those fundedby the project's equity providers. 98. The FNPV of returns to NTPC's four shareholders i s US$442 million (calculated with equity contributions by NTPC shareholders and net revenues after operating expenses and debt service payments for the life of the concession). Of the US$442 million, the NPV of the GOL's returns from the project would be US$246 million (before deducting repayment of any debt it incurs to finance its equity contribution); the private sponsors' NPV from the project would be about US$196 million (assuming that all of the sponsors' development costs that have not been reimbursedb y the project are sunk costs; these are expected to be about US$33 million). 99. The financial IRR for the project i s 11.7 percent. The FIRR for the private sponsors i s less than 16 percent, and i s considered to be reasonable and within the range of industry practices.38For GOL, the FIRR i s about 21.6 percent (see Table 2 below for detail^).^' 1 Table2: ProjectReturns(FNF'Vs andFIRRs) Projectas a Governmentof Lao PrivateSponsors Whole4' PDR Gross Revenues (US$ millions) 69129 I 17959 I 27125 I Present Value of 1,289 329 397 Returns @ WACC (US$ millions) FIRR (%) 11.7 21.6 ~ 1 6 % ~ ~ F " V @ WACC (US$ 235 246 196 millions) 38 Commercially sensitive and proprietary information. 39 Prior to repayment of its debt to EIB and ADB regarding its equity contributions and including GOL contribution. 40 FNPVsand FIRRs are calculated on the basis of the project's cash flow before debt service and taxes. 41 Commercially sensitive and proprietary information. A 145 Returns to the Government of Lao PDR ResourceUsage Income Dividends GOL Charge Taxes Contribution fromNTPC Base Case Cumulative(in 783 438 709 29.2 NominalUS$ millions) Base Case Present Value at 118.0 57.7 132.4 20.8 WACC (inmillions) Distributionof GOL Revenues 160,000 I ~ 140,000 120,000 u 100,000 =I- 5a 80,000 # VI 60,000 3 40,000 20,000 0 42 As per clause 19.1of the Concession Agreement providing GOL reimbursements for loss of biodiversity and development costs. A 146 101. IDA (through the NTSEP) and AFD are providing grants, and ADB and EIB are providing loans to GOL to fulfill their funding needs as an equity investor in the project. GOL would be required to repay the ADB and EIB loans, This debt i s expected to have a grace period of 6 years, and first repayments are likely to begin in 2011. Net FIRR to GOL after debt service i s expected to be 21.1 percent and net FNPV to GOL after debt service i s expected to be US$233 million. Returns to the Private Shareholders 102. From the perspective of NTPC's private shareholders, financial viability i s assessed on the basis of the FIRR on their invested equity and the NPV of investor cash flows. This provides a measure of the overall return on equity over the project life. The project i s considered financially viable for the shareholder group as a whole if the FIRR i s equal to or greater than the shareholders' expected return on equity. (This i s equivalent to an NPV that i s equal to or greater than zero). FIRR and NPV are calculated over the period of PPA validity, which includes the project construction period (May 2005 - October 2009) and the 25-year operating period (November 2009 - October 2034). 103. For the purposes of the analysis, cash outflows incurred by the private shareholders consist only of equity injections made by EDFI,EGCO and ITD into NTPC.These injections are made over the NT2 construction period to fund a portion of project capital costs. Cash inflows to shareholders consist only of dividends paid b y NTPC over the operating life of the concession. The key inputs employed in this analysis regarding project costs, power sales, revenues and NTPC profitability are the same as those discussed above. 104. Dividend payments from NT2 are projected to begin in 2010-11 and are expected to continue through the remainder of the concession. The dividend i s calculated and paid semi- annually as the full amount of surplus cash generated during the period and subject to a minimumdebt service coverage ratio (DSCR) of 1.2.43 105. The present value of returns to the private shareholders i s expected to be US$397 million. The financial NPV from the project i s expected to be US$196 million. The financial IRR for the private sponsors i s expected to be under 16 percent, which i s considered reasonable and according to market expectations (based on the assumption that all of the development costs that have not been reimbursed by the project are sunk costs - about US$33 million spent on the project beginning in 1993). Ifsuch direct costs, and the opportunity cost of the capital invested were included as costs borne by private parties for the development of the project, their overall expected returns would be muchlower. Sensitivityand ScenarioAnalysis 106. A sensitivity and scenario analysis has also been carried out on the project cash flow. The returns to government and to the sponsors are sensitive to significant variations in the project cost estimates and time delays in implementation of the project, as shown in the following table. 43 Surplus cash is defined as net cash generation after all cash obligations have been fully met. Cash obligations consist of the sum o f (i)debt service; (ii)operating and maintenance expenditures; (iii)all tax and royalty obligations payable; (iv) net working capital requirements; (v) net contributions to the Major Maintenance Reserve Account and Debt Service Reserve Account. A 147 The current contingent financing plan i s based on a one-year delay scenario. The commercial lenders have reviewed the need for contingent financing under various causes for delay and have identified a need for US$200million of contingent financing in such a scenario.44 Table 4: Sensitivity and Scenario Analyses45 Scenario Projectas a Whole46 LaoPDR PrivateSponsors I Lenders IRR NPVg IRR NPV Minimu (as a %) (US$ (+/- (US$ mDebt millions) millions) mer the millions) Service base Cover Ratio Base Casea 11.7 234.7 246.2 49 196.0 1.48 10% increase inconstruction q- case - as a %) costs with no delays46 11.0 157.4 21.6 I 246.2 0 196.0 1.48 1-year delay in 4 commissioning on account of 9.7 -13.3 -4.1 73.5 1.26 non-performance by NTPC 16*9 I 169.9 1-year delay in I commissioning on account of non- performance by the HeadConstruction 10.2 54.5 -2.7 120.4 Contractor (HCC) (NTPC receives liquidated damages ,,6 under the contract).46 2-year delay in commissioning on account of 8.9 -116.7 146.5 -4.9 NTPC5' 44 The contractual arrangements contemplate an 18-month extension if NTPC (or the head contractor) fails to complete construction within the scheduled 54 months. In addition to such 18-month extension, the contractual arrangements provide for: (i) a 24-month extension inthe event of a Lao political force majeure event; and (ii) a 30-month extension for other natural force majeure events. These extension periods are consistent with market practice for such a financing. The analysis takes into account any liquidated damages that are payable by various parties under various circumstances of delay and the party bearing the particular risk of delay and all o f the additional costs, as agreed contractually during the first year of delay. 45 There should be a very limited potential increase in cost to the shareholders in the event of a construction cost overrun or time delay due to the performance of the head contractor, as the HCC is a fixed-price, time-bound contract. EDF will provide performance bonds and securities to this end. Contractually, NTPC is only liable for up to US$35 million of unforeseen cost overruns or for geological contingencies, which have been pre-funded in the financing plans. 46 This analysis has been undertaken from the perspective o f the project as a whole and not from the perspective o f the equity providers and, therefore, it includes all costs associated with the debt undertaken by NTPC. 41 Discounted at 9.76 percent; calculated pre-completion WACC for the project. 48 No contingent finance is utilized and the project begins operations as scheduled. 49 Commercially sensitive and proprietary information. 50 Under the commercial transaction with the lenders, financing is available only for a maximum of one-year delay scenario for NTPC. The technical analysis carried out by the lenders engineer clearly indicates that a delay of over 1year is a remote possibility and does not need to be financed upfront. The scenario presented, therefore, A 148 Scenario Projectas a Whole46 I LaoPDR I PrivateSponsors I Lenders I I IRR NPVa IRR NPV IRR NPV Minimu (as a %) (US$ (asa %) (US$ (+/- (US$ mDebt millions) millions) over the millions) Service base Cover case as - Ratio a %) Non-performance o f EDL as an off-taker51 11.3 188.3 21.0 229.3 -0.9 166.6 1.42 Decrease inPower Demand-only Primary 10.7 111.2 19.9 201.7 -2.4 117.7 1.33 Energy Dispatched'' Hydrology Risk-average reduction inPEof 13%over the first 2 years o f the 11.5 211.8 21.1 240.1 -0.7 180.3 1.17 operating periods3 Increase in Operating Expenditures by 20% per 11.6 219.8 21.4 241.6 -0.3 185.7 1.45 annum US$ inflation increases by 5% for the life of the EGAT 10.8 112.7 20.3 196.4 -2.4 105.7 1.33 PPA Thai Baht appreciates by 20% for the life of the EGAT 12.1 332.2 22.7 294.9 1.3 257.9 1.44 PPA Thai Baht depreciates by 20% for the life of the EGAT 11.4 171.1 20.8 214.2 -0.9 155.5 1.47 PPA 1-year delay in commissioning on account of non-performance by NTPC & Decrease inPower 8.8 -125.4 15.4 129.6 -6.0 2.4 1.14 Demand-only Primary Energy Dispatched 1-year delay in commissioning on account of non-performance by NTPC & average reduction inPEof 9.5 -34.8 16.6 165.1 -4.5 61.1 1.02 13%over the first 2 years of the operating period. assumes that all of the available contingent financing is spent over the first year period, and that the lenders absorb the cost of the additional 1-year delay inrepayments. 51 Assumes that power is dispatched to EDL,however EDLdoes not pay for the power that is dispatched to it over a period of 25 years. 52 This scenario replicates the low demand of power during the 1998Asian Crisis. Duringthe last Asian crisis, the Thai government and EGAT honored all o f its PPAs with IPPs. This scenario assumes that power demand will only materialize to the extent that only Primary Energy i s dispatched. 53 Based on the worst hydrology scenario projectedby the Technical Advisor to the commercial lenders. A 149 Annex 12: Safeguard Policy Issues L A O PEOPLE'S DEMOCRATIC REPUBLIC Nam Theun 2 Hydroelectric Project and NamTheun 2 Social and Environment Project Environmentaland SocialImpact Assessment, Management Plans and Monitoring Arrangements A. Overview Impact Assessment Process 1. The Nam Theun 2 Hydroelectric (NT2) Project i s classified as a "Category A" operation under World Bank environmental screening procedures specified inOP 4.01. The project triggers actions under all ten World Bank safeguards policies and requires comprehensive environmental and social impact assessments. Due to its long gestation period, the project has undergone numerous environmental and social analyses, dating back to the late 1980s and documented in an extensive set of reports. Policy and Regulatory Framework 2. The plans, process and documentation described below are responsive to the policy and regulatory requirements o f the Government of Lao PDR (GOL), the World Bank, including IDA and MIGA, the Asian Development Bank (ADB), Agence FranCaise de DCveloppement (AFD) as well as other partners in the financing consortium, such as the European Investment Bank (EIB)and the Nordic Investment Bank (NIB).Because the GOL requirements for environmental and social analyses are less well articulated than those of the donor community, it has generally been accepted that the World Bank policies would guide the overall project preparation and evaluation process. GOL has expressed its safeguard requirements through a number of instruments, such as the National Environmental Action Plan (1994), the Environmental Protection Law (1999), the Law on Water and Water Resources (1996), the Forest Law (1996), and the Land Law (2003). These laws create the basic regulatory foundation for implementation of the project. A set of additional legal instruments, specifically related to the NT2 project have also been issued at the Prime Ministerial and provincial levels. Key Safeguard Documents 3. The package of safeguards documents prepared for the Nam Theun 2 project comprises three core reports: (1) the Environmental Assessment and Management Plan (EAMP); (2) the Social Development Plan (SDP); and (3) the Social and Environmental Management Framework and Operational Plan (SEMFOP) for the NT2 Watershed. The SDP includes a number of elements: (i) the Nakai Plateau Resettlement Action Plan (RAP), covering all cases of physical displacement and loss o f assets; (ii) the Nakai Plateau Ethnic Minorities Development Plan (EMDP); (iii) Resettlement (Acquisition and Compensation) Plan and EMDPfor populations the located on lands required for the construction of project civil works; and (iv) the Resettlement and Livelihood Restoration Program and EMDP for populations affected in the downstream areas, where livelihoods impacts (and very limited physical displacement) are foreseen. These are complemented by the Strategic Impact Assessment (SIA) for the Lao Hydropower Sector, the A 150 Cumulative Impact Assessment (CIA) and the Head Construction Contractor's Environmental Management and Monitoring Plan (HCCEMMP). 4. Each of these documents provides background and technical information on expected impacts o f the project; the mitigation and compensation measures proposed; the implementation arrangements, including institutional responsibilities, budgets and timelines; and the monitoring and supervision programs designed to ensure compliance with all commitments made b y the developers and the GOL. The core safeguards documents are further supported by a large number of specialized technical analyses which have been carried out on a variety of subjects over a period of many years. A fuller description of the contents of these documents can be found in Attachments 1and 5 of this Annex. B. Analysis of Alternatives 5. GOL completed a comprehensive study of alternatives in 1998.The study was conducted under the direction of the Hydropower Office of the Ministry of Industry and Handicrafts (MIH.) and was undertaken by the independent consulting firms of Lahmeyer International and Worley International. The Lahmeyerworley study included an in-depth assessment of the following, among other topics: the potential for power export from Lao PDR to markets in the Greater Mekong region; likely growth in electricity demand inThailand; the competitiveness of the NT2 project vis-&vis other power generation options in Lao PDR; and different site configurations for NT2. In 2000, a partial update of the study, the Hydropower Development Strategy Study, was completed. This study re-assessed all candidate hydropower projects for domestic supply and export. Using a multi-variable weighting system,' NT2 received the highest viability score for hydropower projects among 15 potential hydropower schemes. The 2004 Power System Development Plan (PSDP), authored by Maunsell and Lahmeyer International, also assigned NT2 the highest score using the "adjusted weighted generation cost" method.2 A more complete description of the Analysis of Alternatives, including the "no action'' alternative, i s provided in Annex 14. C. Summaryof Environmentaland Social Impacts and Mitigation 6. Environmental and social impacts are anticipated in five key geographic zones: (1) the Nakai Plateau; (2) the Nam Theun Watershed, including the NNT National Protected Area (NNTNPA) and two corridors linkingthe NNTNPA to two other protected areas (HimNamN o and Phou Hin Poun); (3) downstream of the powerhouse in the Xe Bang Fai Basin; (4) downstream of the Nakai dam in the Nam Theun-Nam Kading Basin; and (5) the Mekong River. These zones and sub-zones are illustrated in Map 33574, in the map section of this document. A summary of the expected impacts and proposed mitigation measures in each zone i s provided below and further details can be found in Attachments 2 and 3 of this Annex. The complete set of safeguard documents can be found in the Bank's InfoShop and in Project Information Centers The weighting system was used in a project rankingprocess known as the Multi-Objective Scenario Evaluation System (MOSES) comprising technical, ecological, social, financial, economic, regional development and state * of preparednesscriteria. The adjusted weighted generation cost refers to the adjustment for environmental and social effects (both positive and negative). A 151 inThakek and Nakai, as well as in Vientiane and Bangkok. All documents are also available on the Nam Theun 2 website maintainedb y NTPC. A summary of applicable safeguard policies and key measures taken to ensure compliance therewith i s presented in Attachment 4 of this Annex. Zone 1:Nakai Plateau 7. Environment. The major environmental impacts in this zone will result from the inundation of approximately 450 km2 of the Nakai Plateau to form the N T 2 reservoir. The main impact will be the loss of terrestrial and aquatic habitats, further increasing current population pressures on wildlife in the area. Also potentially serious are water quality issues associated with the decomposition of organic matter in the reservoir, creating conditions o f low oxygen andhigh nutrient levels, especially in the lower strata of the reservoir, and potentially affecting the viability of proposed reservoir fisheries programs. Downstream receiving waters will also be affected. Inaddition, fisheries and aquatic life in the tributaries feeding the N T 2 reservoir will be affected as a result of interruption of migratory routes. Greenhouse gas (GHG) emissions from the reservoir, in the form of methane, would contribute to a small increase in global emissions levels, This amount i s estimated to offset the reduction in GHG emissions resulting from the substitution of hydropower by fuel-burning technologies currently in use in Thailand. Other issues, such as the influx of construction workers into the project area, could create potential health, safety, and natural resource management problems. 8. The EAMF provides a thorough analysis and accounting of habitat types that will be lost on the Nakai Plateau. As compensation for the impacts on natural habitats in the plateau and other project areas, the project will finance the long-term management of the Nakai Nam Theun NPA and two adjoining corridors which form the NT2 Watershed. The project will also implement species-specific wildlife management programs for the plateau area. Other key initiatives will focus on the management of the water quality in the reservoir through possible vegetation clearing, and avoiding or minimizing the impacts arising from construction o f resettlement sites, the headrace channel, access roads and the relocation and upgrading of Road 8b. Mitigation measures for these and other impacts have been incorporated into the project design. Details can be found inthe EAMP. 9. Social. The communities of the Nakai Plateau belong to a number of ethnic minorities, including Brou, Vietic, Bo and Tai/Sek and are all considered Indigenous Peoples under the Bank's policy definition. They all have a sense of belonging to the area. Some have migrated to the area, live in mixed villages, inter-marry and have more in common with each other than with the lowland Lao ethnic group. A few communities, due to their small population size and their linguistic and cultural characteristics, may be considered as minorities within the plateau population and will require even more specific mitigation measures. Many plateau villagers practice "swidden" (shifting cultivation) agriculture and gather forest products. Fishing and livestock are other sources of livelihood, as i s wage income. The plateau population i s among the poorest in Lao PDR. Rice insufficiency i s a serious challenge for most households. Their access to public services i s also limited. 10. The communities of the plateau will be affected by the creation of the Nam Theun 2 reservoir and approximately 6,200 individuals (1,120 households) will need to be physically relocated. Most, however, will be relocated within their existing traditional territories. The resettlement program i s designed as a development intervention aiming to significantly improve the livelihoods of villagers to be relocated. The resettlement planning has followed a A 152 participatory process. The current livelihood plan will be detailed in village development plans and household livelihood plans during implementation. Some villages, particularly the Vietic and, to a lesser degree, the Brou and Bo, are more vulnerable than the Tai and may have more difficulties adapting and benefiting from new and improved livelihoods systems. Specific measures to assist such villages and other vulnerable households have been incorporated into the project design. A dedicated fund, administered jointly by NTPC and GOL, provides a safety net for food security. Details can be found in the SDP. 11. The project will also affect Oudumsouk Town in the Nakai District through the construction of saddle dams, establishment of two construction camps (for tunneling and the intake channel) and partial flooding. All 350 families in Oudumsouk Town will be impacted in varying degrees: 278 families will lose their houses; some households will lose their agricultural lands due to flooding and all households will be impacted b y the construction camps (as a result of issues related to the influx of camp followers, traffic accidents, dust etc.). Affected persons include small businesses, farmers and government officials. A resettlement program has been developed (included in the SDP). The preparation of an urban plan for the new Oudumsouk Town (between the flooded area and saddle dams) has commenced. 12. The social mitigation program for the Nakai Plateau i s comprehensive and covers replacement of lost assets, provision of land, housing, infrastructure and services, and a range of livelihood options including fisheries, forestry, and agricultural development. The project proposes to achieve household income targets well above the current levels o f around US$450. NTPC i s committed (and bound by the CA) to achieve a target higher than the national poverty line (US$SOO in 2002) in year 5 after resettlement. NTPC and the government have committed, in addition, to a "best endeavor" to raise average village household incomes to the average national rural income level in year 9 (US$1200 in 2002). 13. The resettlement sites and infrastructure design options have been selected based on a series of interactive discussions between the project proponents and the affected communities. This has ensured that, to the maximum extent feasible, people will be moving within their traditional territories. To test the robustness of the design of the resettlement program, the GOL and NTPC relocated three hamlets of 30 households at the end of 2003. The households were provided with housing, water, electricity, roads, and basic services, and support (in the form of skills and agriculture inputs) was provided for them to practice the livelihood models - irrigated agriculture, livestock, forestry and labor payments. Lessons from this pilot resettlement are being used by NTPC to refine the program design. Social risks will be minimized by building on existing social organizations and traditional institutions. Specific measures to promote greater tenure security are also included in the mitigation program. Strict controls on work camps and on the influx of in-migrants will help protect the resettlers from outside influences. 14. On the plateau, development assistance is provided to improve livelihoods through material inputs (agricultural implements, fertilizer, seed, fishing gear, forestry implements), training, agricultural extension assistance, rights to land, forest and reservoir fisheries, resettlement site infrastructure, and education and health services. On project lands, PAPSare entitled to compensation and livelihood restoration to replace assets, income levels, and living standards. A gender strategy has been developed for the project and has been mainstreamed in the overall design of the livelihood development program. This has been fully reflected in the A 153 SDP. The vulnerable (such as widowed families and the disabled) have also been identified and will be assisted through a targeted program with a dedicated budget. Zone 2: NT2Watershed 15. Environment. As an offset to natural habitat loss on the plateau and other project lands, the project will provide secure financing, over a 30-year period, for the management of the Nakai Nam Theun NPA and the corridors linking it to two other protected areas (together referred to as the NT2 Watershed). Decree 25 established the Watershed Management and Protection Authority (WMPA) and Decree 39 (replacing Decree 25) sets forth the key parameters for management of the watershed. One of the main challenges for the successful conservation of the watershed i s the control of illegal wildlife trade, and unsustainable harvesting of non-timber forest products. The SEMFOP establishes a long-term vision to guide the management of the area and developed an eight-year program to address these critical issues. For example, trained patrols will be active throughout the protected area; a provincialhational cooperative action plan has been signed between Lao PDR and Vietnam to control illegal trans-boundary hunting, trading and transporting of wildlife and plants; and both short-term and long-term capacity building activities will be undertaken through technical assistance and support from an international wildlife conservation NGO. Decree 39 prohibits mining, logging and other commercial extractive activities within the watershed, and SEMFOP establishes that the width of tracks for access should be kept to two meters. 16. The establishment of project construction work camps, reservoir clearance activities, upgrading and development of roads and the formation of the reservoir will create further potential threats to the protection of the watershed. The project will inevitably lead to improved access to the watershed area, but both the SEMFOP and provisions in the EAMP and the HCCEMMP address these potential threats. The project will also lead to the loss of natural habitats in the watershed as a result of construction activities. These are all included in the natural habitat accounting. This loss has been compensated by declaring the NT2 Watershed as a conservation offset. 17. Social. The approximately 5,800 individuals that reside in the Nakai-Nam Theun NPA depend predominantly on subsistence livelihoods and live well below the national poverty line. Most villages practice shifting cultivation and collect non-timber forest products (NTFPs), including wildlife, for consumption and sale. They have limited access to infrastructure and social services such as health and education. The population belongs to a number of ethnic minorities, including Brou, Vietic (both of the Mon-Khmer ethno-linguistic family) and Upland Tai groups. 18. The SEMFOP seeks to balance conservation and development objectives in the NNTNPArecognizing that effective biodiversity conservation will depend on the support of, and will need to generate benefits for, the very poor communities that reside within its boundaries. The plan recognizes that adverse social impacts could result from limitations placed on currently unrestrictedaccess to natural resources of the NNTNPA.Detailed resource management plans, to be developed through a community planning process during implementation, may impose restrictions to quantities, timing and types of resources that can be extracted by local communities. Villages in the NPA and in the peripheral impact zone (PIZ) may be affected by improved enforcement of existing legislation, such as those concerning wildlife hunting, and by the establishment of regulations concerning land and resource use. Mostly, however, they will A 154 benefit from enhanced land and resource use rights, improved livelihoods through participatory natural resource management activities, and improved access to basic services such as water supply and sanitation, health facilities and schools. These plans and associated regulations will be agreed to with the respective villages and any impacts will be compensated through livelihood and community development programs. Zone 3: Downstreamof the Powerhouseinthe Xe BangFaiBasin 19. Environment. The impacts in this zone relate to the increase in water flow, changes in water quality, and daily and seasonal variability in flow in the Nam Phit and Xe Bang Fai Rivers. The Nam Kathang will also experience changes in water quality. Other impacts in this area arise from construction activities associated with ancillary developments such as the powerhouse, the regulating pond, construction work camps, and the conveyance channel. 20. The water flow will increase by an average of 280 m3/sinthe NamPhit and the Xe Bang Fai rivers, which represents a very significant increase in the flow o f the Nam Phit (a small stream) and more than double the current monthly average flow in the Xe Bang Fai. With the project, the mean dry season flows will increase by about 10 times and the mean wet season flow by about 35 percent. Powerhouse operations will also require variations in the weekly flow, with low flows on Sundays when power will not be produced. 21. The new flow conditions in the Xe Bang Fai (XBF) and Nam Phit are likely to result in increased streambank erosion, particularly due to water flows dropping to about 30 m3/s on Sundays (due to low power demand). Dry season aquatic habitats, such as rapids and shallow areas, which may be favored by fish and are easily fished, will be permanently submerged. In addition, once the powerhouse i s operational, water with different characteristics (including dissolved oxygen, nitrogen, biological oxygen demand, temperature and turbidity) would be mixed into the water of the Xe Bang Fai, Nam Phit and Nam Kathang. At a minimum, these changes are expected to lead to a long-term decline in fish productivity, preceded by a sharp, two-to-three year decline in fish catch immediately following the commercial operation date (COD). The nature, scope and time implications of such changes are difficult to model with precision and will require a continuous monitoring program during implementation. However, experience from the nearby Theun Hinboundam indicates that fisheries losses in the range of 50- 80 percent can be expected, as a worst-case scenario. 22. Measures which are lacking in the Theun Hinboun project and have been incorporated into the project's design in order to reduce changes in water quality include minimizing biomass in the reservoir and installing aeration structures to oxygenate the water downstream of the regulating pond. Adverse impacts due to fluctuations in water flows in the Nam Phit and the Xe Bang Fai, while largely unavoidable, particularly in the dry season, will be reduced b y adaptively managing the powerhouse andregulating pond operations. For the Nam Kathang, the flow can be completely controlled by the regulating pond. 23. There will be large-scale construction activity in this zone, including the powerhouse, substations, regulating pond, downstream channel, and transmission lines. These construction works and the associated infrastructure, such as worker camps, access roads and quarry sites, will result in some conversion of natural habitats and other impacts, such as land acquisition, dust, noise, air quality, waste generation, soil erosion, and other aspects of work camp A 155 management. These will be mitigated or minimized through the site-specific environmental plans developed under the Head Construction Contractor's EMMP. 24. Social. It has been estimated that 40,000 people living along the Xe Bang Fai will be directly affected by the project. An additional 30,000 people along tributaries and hinterland villages in the basin of the Xe Bang Fai could also be adversely affected through reduced access to river fisheries. The Xe Bang Fai area i s more typical of lowland areas in Lao PDR. The population i s dependent mostly on paddy cultivation, livestock, fishing and wage income, and i s noticeably better off than the population on the plateau and the NPA; still, approximately 40 percent live below the national poverty line. Most of the population i s from the Lao ethnic group; however, there are also ethnic minorities, mainly Brou. Project operation i s likely to affect fisheries catch, river gardens, irrigation pumping systems, potable water supply, dry-season transport across tributaries, physical assets and productive lands. 25. Impacts on property and livelihoods will be fully compensated. Project-affected people are entitled to compensation for lost assets (such as riverbank gardens and domestic water supply) as well as for restrictions of access. For fisheries losses, the approach i s restoration of protein and income loss through the development of alternative livelihoods. In addition to impacts on fisheries as a result of changes in seasonal flows and quality of water, access to dry- season fishing areas would also be affected. Some traditional fishing technologies may no longer be effective under the new flow regime. Thus the program will support investment in a menu of nine different livelihood options that have been developed and discussed with affected village households. The further development of this menu of options will be carried out in close collaboration with affected villages during the first 18 months of project implementation, and will be adjusted to reflect the results of a series of pilots. Fifty percent of the program will be implemented before COD. The details of these programs are described in the SDP. 26. The communities in the upper and middle stretches of the Xe Bang Fai River will be able to benefit from reduced flood damage, reduced pumping costs, and increased dry season irrigation in selected areas. For the expected increased flooding of agricultural land in the lower XBF, mitigation measures comprise the raising of the riverbanks to protect paddy fields, complemented by development assistance where needed, through some o f the same alternative livelihood models proposed for fisheries losses. Additional impacts in the downstream area are public health and others associated with the presence of a large worker population in the vicinity of key construction sites, such as the powerhouse, regulating pond and conveyance channel. 27. Project civil works and construction-related activities will require acquisition of land, structures and crops. These impacts and the affected population have been identified. About 2,700 people in 500 families will be affected, including 90 households that will need relocation. A Resettlement (Acquisition and Compensation) Plan andan EMDP have been developedin line with local laws, World Bank and ADB policies. A social management plan has been developed to address other possible social impacts associated with the influx of construction workers and camp followers, such as security and conflicts with the local population. A regional public health planhas been developed to address potential public health issues. Zone 4: Downstreamof theNakaiDaminthe NamTheun-NamKadingBasin 28. Environment: The flow of the Nam Theun at the dam site will significantly decrease from a mean flow of 206 m3/s(current range i s 25 to 3,000 m3/s)to a proposed 2 m3/s.The main A 156 impacts will be experienced in the areas between the dam and the Theun Hinboun head pond, approximately 50 km downstream of the Nakai dam. The reduced flow in the Nam Theun will reduce habitat for fish and aquatic organisms and will cut off migration of fish in the Nam Theun. The reduced flows in the Nam Theun would also weaken the dilution effects for incoming tributary flows downstream of the dam. This would lead to more acute water pollution problems in the longer term as tributary inflows become more degraded from upstream pollution sources in and around Lak Sao. Combined with the effects of the Theun Hinboun dam, these impacts are expected to significantly reduce the productivity of fish and other aquatic organisms in the area. In addition, pollution problems caused by unrelated mining,industrial and domestic activities inthe Nam Theun-Nam Kading Basin are also becoming more severe. 29. In order to assist the river system in adapting itself to modified flow conditions, the project will implement a strategically focused adaptive management program, based on the results and conclusions of several studies: (i)adaptive management of riparian releases; (ii) studies on fish population; (iii)studies on stream morphology; and (iv) water quality and monitoring program. Inaddition, a variable intake structure and an aeration valve are included in the design of the Nakai dam. This will allow higher quality water from the upper strata (epilimnion) of the reservoir to be discharged through the dam, after which it will be aerated at the point of release. 30. The area surrounding the dam and the downstream Nam Theun will also be impacted from the construction of the dam and road upgrading. The construction work and the associated infrastructure (work camps, access roads, quarries, and other facilities) will result in some conversion of natural habitats and short-term impacts such as local air quality, waste generation, soil erosion, and other aspects of work camp management. These impacts will be mitigated through site-specific plans that include protocols for managing the relevant construction-related issues including vegetation clearing, erosion and sediment control, chemical waste and control of spills, waste management, construction work camp management, quarry management, road construction, and physical cultural resources. These will be implemented by the Head Construction Contractor as part of the HCCEMMP. 31. Downstream o f the Theun Hinboun dam, flows will also decrease due to the change in the spills over the dam into the Nam Kading, further affecting fish habitat and likely reducing fishpopulations inthat area. Also, the number of days experiencing the current minimumflow of 5 m3/swill be increased from the current 120 days to about 175 days. The minimumflow regime below Theun Hinboun dam will be modified in order to reduce the combined impact o f N T 2 and the pre-existingconditions of Theun Hinboun on fish migration. 32. The GOL has committed to taking a long-term, strategic and integrated approach to the management of the Nam TheunNam Kading river basin, to address and mitigate the cumulative impacts caused by different development projects, including the suite o f planned hydropower and mining projects that are in place or may come to be implemented. This would serve as an approach to river basin management that could be extended over time to other basins within Lao PDR. The GOL is seeking the support of the Bank for these efforts, including the establishment of an appropriate institutional structure for river basin management, through the Lao Environment and Social (LEnS) project. 33. Social. In the area between the Nam Theun dam and the Theun Hinboun head pond, on the main stream of the river, there are no permanent villages. However, there are villages, mainly A 157 of ethnic minorities that live on the tributaries and nearby areas that use the Nam Theun for fishing. About 40 villages have been identified as usingthe NamTheun for fisheries and aquatic products to varying degrees. The impacts on village fish catch have been estimated to range from 10-35 percent reduction in some tributaries to as much as 60 percent reduction in the main stream of the Nam Theun. Both these estimates are considered by fisheries specialists to be "worst case" scenarios. 34. The potential fisheries impacts along the Nam Theun and its tributaries will be mitigated through a livelihoods compensation program that i s similar to that proposed for the XBF. The program will offer villagers a range of livelihood replacement options identified through a participatory planning process. Livelihood options are intended to replace both lost protein as well as loss of income resultingfrom potential declines in fish catch. It will be carried out within the first three years after start of implementation, before closing of the dam and start o f reservoir formation, with 70 percent completed by COD. Zone 5: The Mekong River 35. Environment. The project will result in changes to the seasonal flows in the Mekong between the confluence of the Nam Kading and the Xe Bang Fai rivers. A reduction in both wet season and dry season flows i s expected, amounting to decreases of approximately 7 c m and 23- 29 cm respectively in the average water level of that stretch of the Mekong River. Flows below the confluence of the Xe Bang Fai will also be affected but will be attenuated as one moves further downstream. A due diligence assessment undertaken by the task team indicates that the social, economic and ecological impacts of these changes are likely to be insignificant. 36. Potential cumulative impacts of NT2 and other developments (such as other hydropower projects, transport and irrigation projects, and urbanization) likely to occur in the Mekong region were examined through a Cumulative Impact Assessment using five and 20-year scenarios. The results are summarized in Attachment 5 of this Annex. The study found that the NT2 project impacts beyond its immediate area of influence are likely to be marginal in light of the nature and scale of other water resources developments foreseen in the Mekong region as a whole. The NT2 project accounts for less than 15 percent of the impacts on Mekong flows in the five-year scenario and less than 6 percent of the impacts in the 20-year scenario. At Savannakhet, approximately 50 km downstream of the mouth of the Xe Bang Fai, the project i s expected to decrease the wet season flow by 2 percent and increase the dry season flow by 8 percent. Similar but less pronouncedchanges are expected in the areas further downstream. These flow changes are expected to increase the average wet season level of the Tonle Sap in Cambodia by 3 c m (out of an average depth of 7.6 m) and to increase the dry season level by 2 c m (out o f an average depth of 0.9 m). The study concluded that NT2 would have no significant impact on the Mekong sediment balance; an insignificant negative impact on flood plain and Tonle Sap fisheries; and a positive but insignificant impact through reduced flood incidents, improved irrigation and reducedsalt water intrusion inthe MekongDelta. 37. Social. The principal social impact in the Mekong zone will be the combined effects of the NT2 project with other decisions affecting water quantity and quality in the Greater Mekong Region. Over time, the combined effect of these decisions, and the additional pressures they are expected to create on the resource base, will likely exacerbate issues relating to Mekong navigability, fisheries, water availability and water quality, affecting populations residing throughout the river basin. 4 A 158 38. While the N T 2 project i s not an appropriate entry point to address these issues, the GOL has expressed its commitment to participating, through the Mekong River Commission (MRC), in long-term, comprehensive planning of the Mekong Basin, to promote the sustainable, optimal use of the basin's natural resources. The proposed Lao Environmental and Social project (LEnS) will provide institutional strengthening to GOL to carry out improved river basin development planning, both within its borders as well as within the Greater Mekong Region. In addition, the Government sees in the NT2 project a model for testing guidelines and approaches that, with suitable adaptation, could be applied more broadly in the country. In the medium-term, the benefits from such an approach would lead to the strengthening of Lao capacity for biodiversity conservation, management of social and environmental aspects of development programs, and improvement of rural livelihoods. LinkedProjects 39. The NT2 project includes the 500 kV transmission line from the powerhouse to the Thai border. However, the delivery of power from NT2 to the consumers requires two other transmission lines, not being financed under the project: (i) a 500 kV transmission line, to be constructed and financed by the Electricity Generating Authority of Thailand (EGAT) contemporaneously with NT2, to transport NT2 power from the Lao border into Thailand; and (ii)115 kV power lines from Thakek to Mahaxai and from Mahaxai to Xe Pon (recently completed) to transmit power from NT2 to the Xe Pon Gold Mine and the Lao CR-2 grid. The mine pre-dates the project and its operation does not significantly depend on energy from NT2. Due diligence on the Thai transmission line was done by the Bank and ADB through field visits and meetings with EGAT and the Ministry of Natural Resources and the Environment (MONRE) of Thailand. The Bank reviewed the Initial Environmental Examination undertaken b y Lang Xang Minerals Limited (Lao PDR), the owner o f the Xe Pon mine for the recently completed Thakek-Mahaxai-Xe Pon transmission lines. N o issues of concern were identified in either case. The Bank will be following up with EGAT as design of the Thai transmission line i s finalized and begins implementation. D. ImplementationArrangements InstitutionalFramework 40. The NT2 project will be jointly implemented by GOL and NTPC. The Concession Agreement (CA) specifies their respective responsibilities. Within NTPC, overall responsibility for implementation of safeguard-related programs will rest with the Environmental and Social Management Division. Supervision of construction site management will rest with the Head Construction Contractor (HCC). Within GOL, an Environmental Management Unit (EMU) has been set up in the Science, Technology and Environmental Agency (STEA) and a Resettlement Management Unit (RMU) has been established which reports to the Resettlement Committee (RC) chaired by the Governor o f Khammouane Province. The N T 2 watershed i s managed by the Watershed Management and Protection Authority (WMPA), chaired b y the Minister of Agriculture and Forestry. The NTPC division and the three GOL units are already operational and core staff are being progressively hired. The institutional arrangements, staffing and budgets are detailed in the safeguards documents (EAMP, SDP and SEMFOP) and summarized below. A 159 41. NTPC. The company has established an Environment and Social Management Division to implement its obligations under the CA, which include implementing the resettlement and downstream livelihood restoration programs with the RMU, carrying out wildlife management programs with the EMU,monitoring the performance of the HCC, providing technical assistance to the RMU and EMU, financing the conservation offset, and reporting progress to GOL and IFIs. The Division, headed by a Director, will have offices in Nakai, Thakek and Vientiane and be staffed with qualified and capable personnel numbering approximately 70. The current staffing i s around 40 and the entire complement will be hired within six months of financial closure. NTPC also plans to outsource work to private contractors and operational NGOs, and their engagement will be finalized after financial closure. The work of the division will be undertaken b y two offices described below: (i)TheEnvironmentaZManagementOfSlce(EMO)willberesponsiblefordetailedplanning, implementation and monitoring of all environmental objectives and mitigation measures directly under the control of NTPC, as described in the EAMP and the CA. It will also supervise those measures to be implementedby the HCC. The EM0 will prepare monthly progress reports for GOL and NTPC review. A detailed description of the EMO's responsibilities i s provided inChapter 6 of the EAMP. (ii) Resettlement OfSlce (RO) will be co-located with the RMU and have joint The responsibility for the plateau and downstream programs, as specified in the CA and elaborated in the SDP. The RO's responsibilities include: resettlement planning, design of housing and associated infrastructure, design and delivery of livelihoods programs, social services and extension services, administering the resettlement budget, managing and coordinating programs with relevant districts, providing implementation support to resettlers, monitoring the work of HCC and overall progress of social programs, and submittingregular pro,gress reports to RC through RMU. 42. TheHead Construction Contractor(HCC).The HCC, under the oversight of NTPC, will be responsible for implementing measures to control or minimize impacts during the construction period and will supervise the work of construction contractors and their sub- contractors. This will include, among other important measures: ensuring quality of housing and village infrastructure, meeting effluent standards, noise control, erosion control, on-site waste management, and implementing a worker health program. A full description o f these measures i s provided inthe EAMPand the HCCEMMP. 43. GOL. The GOL has a dual role in the NT2 project. As a party to the Concession Agreement, it will perform the functions stipulated therein, including land titling, licensing of project facilities and enforcement of all regulations applicable to any aspect o f the project. In addition, through the Lao Holding State Enterprise (LHSE), the Government holds 25 percent equity in NTPC. As a shareholder, the LSHE i s responsible, jointly with its other partners, to ensure achievement of the project's objectives and that its programs and activities are implemented in accordance with the principles, technical standards and procedures embodied in the C A and the safeguarddocuments. (i)Environmental Management Unit(EMU).The scopeoftheEMU'Smandatecurrently includes: monitoring, supervising and ensuring compliance of NTPC's environmental activities and obligations; review and approval of the HCCEMMF; coordination within GOL to implement various aspects of the EAMP; appointment of an independent A 160 monitoring agency; handling communications and dissemination of information about the project to external parties. The EMU will have offices both in Vientiane and in the field, and will have a staffing complement of around 15, expected to be brought on board in accordance with the agreed staffing plan. (ii)Resettlement Management Unit (RMU). The RMU will have joint responsibility, with NTPC, for the implementation for the resettlement and downstream livelihood restoration programs, The RMU will execute those responsibilities of GOL relating to land acquisition, resettlement and restoration of livelihoods as defined in the CA. The range of tasks include: day-to-day management of the resettlement process in coordination with NTPC, facilitating government authorities to participate in resettlement planning, carrying out public consultations and information dissemination throughout the project implementation, managing the GOL budget for resettlement, relocating project-affected persons, awarding titles and permits, and facilitating the grievance mechanisms. The RMU will report to the Resettlement Committee, and will be supported by a two-tiered structure to implement its activities consisting of: District Resettlement Working Groups and Village Resettlement and Development Committees. The total number of staff of RMUwill be 20, supported by about 100staff at the district level, expectedto be brought on board in accordance with the agreed staffing plan. 44. The Watershed Management and Protection Authority (WMPA). Implementation of SEMFOP i s under the oversight of the WMPA. The WMPA has a broad mandate relating to the management of the N T 2 Watershed (comprising the Nakai Nam Theun NPA and the two adjoining corridors). Its activities will be guided b y the SEMFOP, which includes an initial eight-year operational plan for the watershed. WMPA's responsibilities include: conservation and protection of biodiversity in the NPA; building and strengthening capacity of communities, districts and WMPA staff; and implementing livelihood improvement programs for enclave villages of the watershed area. The WMPA will manage activities specified in the operational plans of the SEMFOP; partner with NGOs to implement SEMFOP activities; and employ an independent monitor to assess its performance. It operates under the guidance of a multi- stakeholder board of directors and i s managed by an Executive Secretariat, headed by a Director. The WMPA's staff strength i s expected to be around 50, to be progressively hired over a three- year period after financial closure. 45. Project implementation arrangements are stated in the Concession Agreement, reflecting provisions set forth in the safeguard documents and further elaborated in the project Implementation Plan and in the Annual Implementation Plans. Core Budget and Contingency Arrangements 46. The budget for implementing environmental and social safeguards and managing the conservation offset will be US$95.6 million over the life of the project. Detailed estimates are provided in the safeguard documents and summarized below. A 161 andSocialMitigationCosts (US$million) I Program 1 Before COD After COD Total (2004-2009) 1(2009-2034)I USD 1 Environmental Management ( E M ) 2.9 0.9 3.8 Social Development -Plateau (SDP) 28.4 10.8 39.2 Social Development -Downstream 8.0 8.0 16.0 Areas (SDP) Watershed Management (SEMFOP) 6.5 I 25.0 1 31.5 1 Total E&S measures 45.8 44.7 90.5 ~~ ~ ~ E&S external monitoring :Panelof Experts, Dam Safety Review Panel, 3.0 2.1 5.1 Lender Advisor (E&S component) I GrandTotal I 48.8 I 46.8 I 95.6 I 47. NTPC has also made provisions in the Concession Agreement (CA) to cover a range of contingencies through the use of cost overrun allowances, performance guarantees and various forms of insurance: (i) for items defined as being "limited by cost" (such as wildlife management programs), in the event that the budget i s exceeded and the activities are not completed satisfactorily, NTPC has provided for a letter of credit of up to US$2.5 million to be used b y GOL; (ii) items defined as being "limited by scope" (such as construction costs and income for restoration), NTPC will continue to finance activities, regardless of cost, until such time as the objectives of the activity are achieved and endorsed b y the POE; (iii) in the case of breach or failure to fulfill its obligations under the CA, NTPC i s providing US$7.5 million in letters of credit; and (iv) as a guarantee for dealing with unanticipated impacts stemming from project implementation, NTPC i s providing a further US$10 million. Eligibility criteria and mechanisms for utilization of these funds are specified in the CA. In addition, NTPC i s setting up an Environmental and Social Remediation Fundto support operation of communal facilities in the resettlement villages on the plateau duringthe post-COD period. RiskManagement 48. The key risks associated with the SDP are as follows: (i) income restoration and The enhancement targets to which NTPChas committed are a significant challenge given the current, very low income levels of affected households; (ii) the proposed resettlement program will entail a substantial change in livelihoods and i s likely to require sustained external assistance to resettlers over an extended period of time; this could create dependency, affecting the longer- term sustainability of livelihood programs; (iii) downstream fisheries losses could be larger than currently estimated, entailing more severe impacts on livelihoods than expected; (iv) the influx of population following the construction camps could also have broad impacts in the project areas; if not properly managed through anticipatory and proactive measures, they could have long-lasting social impacts on the population; and (v) the relatively weak capacity of Lao PDR agencies poses a special challenge in implementing a development-oriented resettlement A 162 program; this includes the difficulty of mobilizing the critical qualified staff within a required timeframe in order to execute the program in a satisfactory manner, and sustaining adequate levels of staffing throughout the implementation period. 49. Risks associated with the EAMP and SEMFOP are as follows: (i) predictions of water quality in the NT2 reservoir may underestimate the length of time required for the water to return to acceptable levels, creating longer term management problems in both the reservoir and the downstream areas; (ii) impacts on aquatic resources in the downstream areas may be more severe than anticipated, with social implications as discussed above; (iii) management programs could be insufficient to address rising pressures on wildlife on the plateau and in the NNTNPA, including from trans-boundary activity; (iv) SEMFOP forest and land use planning methodologies could be ineffective at reaching consensus on accepted land uses, leading to continued pressures on the NNTNPA and adjoining corridors; and (v) monitoring and supervision arrangements may be inadequate to control large-scale construction site impacts. 50. In recognition of these risks, the project has responded by developing a number of strategies to mitigate or manage risk, as described below. 51. Upfront Planning and Budgeting. The project developers have undertaken extensive preparatory work to understand and plan for the environmental and social risks of the project. Proposed programs, organizational division of labor and accountabilities, and budgets were reviewed at appraisal and found to be appropriate to address estimated impacts andrisks. 52. Flexibility during Implementation. The proposed mitigation measures are based on best estimates of likely impacts. However, not all future events can be anticipated. It i s accepted by all stakeholders that some adjustments to the mitigation and compensation programs may be needed during the course of project implementation. Project budgets and work plans will be reviewed on an annual basis and adjustments to scope and nature of work will be made as needed. 53. Participatory Resettlement Planning. The planning approach followed to date has enabled intensive participation of the resettlers, whose concerns and needs have been reflected in the selection of resettlement sites and other aspects of project design. This approach has included the construction of a pilot village to test housing and livelihoods models and to draw lessons that are being taken into account in the design of other villages. Participatory planning will be continued during implementation and will allow for flexibility and adaptability, particularly in the detailed design of villages, housing solutions, and household livelihood activities, tailoring these towards the needs and situation of individual households. Inthe downstream areas, detailed design of mitigation measures will be accompanied b y piloting of the proposed asset and livelihood compensation measures. The resettlement and livelihood restoration programs are front-loaded to allow time to address unanticipated impacts and improve project design well ahead of the start of operations. 54. Adaptive Management of Environmental Programs. A key element in the environmental program i s the "adaptive management" approach taken. The principles of adaptive management involve modifying programs based on monitoring and evaluation of their environmental performance. B y definition, this i s an iterative process. The EAMP and CA both recognize the need for a flexible approach to environmental management that accommodates periodic changes in scope or objective of a specific measure. In particular, this approach will be A 163 applied to the management of the environmental flow downstream of the dam and to the flows from the regulating pond into the Nam Kathang and downstream channel, all of which will be supported by water quality and fisheries monitoring that will help optimize the appropriate flow levels and flow variability. Additionally, the measures envisioned under the wildlife program will be implemented adaptively inresponse to monitoring of wildlife behavior and distribution. 55. Risk Management in the NT2 Watershed. The participatory integrated conservation and development (PICAD) approach developed for the SEMFOP draws heavily on lessons learned from both the positive and negative experiences from projects implemented previously in the Lao PDR and the region over the last 15 years, in particular the IDA-financed District Upland Development and Conservation (DUDCP) LIL in the NT2 Watershed. The SEMFOP has been subject to intense review and revision to ensure that international best practice was considered. The lessons learned under DUDCP, the official approval of the SEMFOP and the issuance of Decree 39 that regulates land use and activities in the watershed, the consultations already held and to be continued, the extensive and intensive monitoring foreseen, the significant and long- term secured budget, and the long timeframe for implementation collectively provide an acceptable risk-management strategy. 56. Continuous Stakeholder Consultation. One of the most important mechanisms influencing the adaptive management and participatory planning approaches will be a continuous, ongoing stakeholder consultation process during the implementation and commissioning periods of the project. Consultation and active participation of affected people will help to identify issues as they emerge so that appropriate allocation of budgets, staff resources, and technical assistance can be made. Ongoing consultation will be an essential element of the overall monitoring mechanisms established for the project. 57. Commitments to Income Targets. NTPC has made binding commitments to meeting household income targets in the resettlement area. If the target to raise household income to the national poverty line i s not met within the specified five-year time period, NTPC will continue to provide the necessary budget and resources until such time as this target is achieved. Household incomes and the effectiveness of livelihoods programs will be tracked by an Independent MonitoringAgency and reviewed periodically by the POE, who has been charged with providing the final acknowledgement of NTPC's compliance with the proposed social program. 58. Grievance Mechanisms. Detailed grievance mechanisms have been designed to address complaints from affected persons or groups. The mechanisms involve several steps starting at the village level with the Village Resettlement Committee, aiming to resolve grievances through discussions and adjustments acceptable to the affected persons. A Grievance Committee has been established to address issues that cannot be resolved at the village or district level, and a local NGO will be contracted to act as advisor and counsel to affectedpersons. 59. Institutional Capacity Building. NTPC and GOL have developed a detailed plan for institutional development and staffing. Human resources would be mobilized from within GOL and the private sector to strengthen existing and new units. In addition, international expertise would be brought in to support project implementation. It i s also planned to engage contractors and operational NGOs to implement some of the programs and to monitor project effectiveness. A 164 Ensuring ConsistencyAcross Financial Institutions 60. The involvement of a large number of diverse financial institutions (IFIs, bilateral donors, ECAs and commercial banks) in the financing of the project has had a positive effect on enhancing the structures being put in place for safeguards, principally because each of these institutions, while looking to the Bank for leadership, i s also interested in ensuring that its own environmental and social safeguards policies and guidelines are adhered to by NTPC and GOL Accordingly, it was agreed that in an effort to harmonize the various institutions' standards, a schedule to the Common Terms Agreement (CTA) between the commercial lenders and NTPC (Schedule 11) would be added to ensure that NTPC adheres to and implements the policies and guidelines o f the Bank and other institutions, including by preparing an overall PIP (derived from Schedule 4 to the CA) and Annual Implementation Plans (derived from Schedule 4 and the PIP and detailing actions to be taken each year), and Additional Plans (detailing plans that are not currently known but that will or may be required in future, e.g., as a result of downstream impacts~.~ 61. Also as part of this extended effort to ensure compliance, as well as harmonization, of the several safeguards policies, Schedule 11(Part 5) requires that NTPC will covenant to ensure that the design, construction, operation and maintenance of the Project, and the conduct of the project, i s not inconsistent with the Applicable Environmental and Social Safeguard Policies and Guidelines as defined inthe CTA. At the same time, the various institutions, including the World Bank, recognized that their several environmental and social safeguard policies and guidelines, while to a very great extent similar, are not identical in format or sometimes in text. Thus, it was also determined that in the event that the requirements under an Applicable Environmental and Social Safeguard Policy or Guideline conflicts with another Applicable Environmental and Social Safeguard Policy or Guideline, the POE will act independently and in a manner to determine which policies or guidelines best protects both the environment and the interests of those affected b y the project Impacts. It also should be noted that World Bank and other IFIS, while not direct parties to the CTA, nonetheless have been given explicit legal rights as third party beneficiaries to enforce their rights under, and to ensure NTPC compliance with, Schedule 11of the CTA. Monitoring and Evaluation 62. The monitoring and evaluation framework for the project i s detailed in Annex 5B. It involves three levels: internal, external and independent. Internal monitoring will be undertaken by NTPC and the relevant GOL units, following monitoring protocols. External monitoring will be composed of the Lenders' Technical Advisor and the Government's Independent Monitoring Agencies for the EAMP, SDP and SEMFOP. The construction contractors' obligations will be tracked through systematic internal monitoring carried out b y the HCC as well as by NTPC's EM0 and the GOL's EMU. All monitoring and compliance documentation will be made The CTA defines "Applicable Environmental and Social Safeguard Policy or Guideline" to include the Equator Principles as well as the policies and guidelines with respect to environmental and social issues of the ADB, COFACE, MIGA and World Bank. The "Applicable Environmental and Social Safeguard Policies and Guidelines" means all of them. A 165 available externally and will be reviewed annually by the LTA, the IMAs and other monitoring bodies. Independent monitoring will be continued by the Government's Panel of Environmental and Social Experts and Dam Safety Review Panel, as well as by the Bank's International Advisory Group. A key role of the POE will be the review of NTPC's performance and "best endeavor" with respect to the achievement of income restoration and enhancement targets. Composition of these panels, although basically stable, may vary in accordance with the issues to be addressed at different stages of project implementation. The frequency of reporting and disclosure of documentation i s detailed inAnnex 13. 63. The EMU established at STEA will monitor the performance of GOL environmental obligations and make recommendations that GOL take steps to rectify any failures to implement its obligations. It will report regularly to the GOL and will work closely with the NTPC's EM0 on all environmental performance matters. Additionally, monitoring of baseline and environmental impacts will be undertaken by the IMA to identify unanticipated impacts when they arise and adaptively manage mitigation measures as needed. 64. GOL will also establish an internal monitoring system to track implementation of the SDP. It will monitor resettlement through its Village Resettlement Committees and District Resettlement Working Groups These groups will provide monthly progress reports to the RMU. The RMUwill also engage a third party to undertake a socio-economic baseline survey to serve as the reference point for external monitoring. Monitoring will cover the period preceding relocation, as well as the relocation and post relocation phases, with special attention to the effectiveness o f income and livelihood rehabilitation programs. E. Disclosure, LocalConsultations andInternational Workshops 65. The project has benefited from a process of public consultation and disclosure of environmental and social information, in accordance with World Bank and ADB requirements, and unprecedented in Lao PDR in terms of its depth, scope, duration and openness. This process, consisting of local consultations and international workshops, i s summarized below and detailed inAnnex 13. 66. Consultations with directly affected people took a number of forms. By the end of 2002, NTPC and GOL had organized several hundred public meetings and informational exchange events throughout the project area. These meetings were intended to both share information with affected people on the nature, scale and timing of planned developments, as well as to solicit feedback and inputs to important elements of the proposed mitigation and compensation plans, These consultations were documented by GOL and NTPC. 67. In 2004, GOL undertook further consultation with affected groups in order to discuss more advanced versions o f the proposed management plans. These local consultations reviewed project impacts and proposed management plans, and discussed concerns such as entitlements, compensation packages, and dispute resolution mechanisms to be used during project implementation. Because many of the project-affected people do not read, and some do not speak the Lao language, the consultative process utilized culturally appropriate communications tools. While some written materials were made available in the form of brief reports and brochures, most public presentations were made using oral techniques combined with photos, illustrations A 166 and other visual tools, When needed, presentations were made directly in local languages or usingtranslation. 68. Feedback from local stakeholders has influenced or been incorporated into project planning and design. For example, the following project design features are the result of local consultations: (i)location of the power station to avoid resettlement; (ii)routing of the downstream channel to minimize resettlement and other impacts; (iii)construction of the regulating pond to minimize fluctuations in daily discharges into the Xe Bang Fai; (iv) embankment protection at the confluence of the downstream channel and the Xe Bang Fai; (v) inclusion of intake and aeration structures at the outlet of the dam and powerhouse to improve water quality in the downstream area; and (vi) commitment to shut down operation before natural over-bank flooding in the upper Xe Bang Fai. 69. In 2004, GOL, project sponsors and international financial institutions also organized workshops to brief international interest groups, including conservation NGOs, human rights groups, government representatives, other financial institutions, parliamentarians, and the media. Workshops were held in Lao PDR, Thailand, France, Japan, and the United States to share information about the project and to discuss country, sector and project-related issues, including the actions taken to mitigate and compensate for project impacts, and approaches to managing potential risks during the implementation period. 70. The consultative process followed during project preparation will be continued through a proactive program of consultations with project-affected people and workshops with other interest groups throughout the project implementation period. The objective of these consultations and workshops i s to ensure that people's concerns are being heard, that accurate information i s being shared, and recommendations for improvement of the project are taken into account at all major milestones. 71. The suite of reviseddraft safeguards documents were made available in-country between May and August 2004, and the draft final reports were provided to the Bank's InfoShop and Public Information Centers of STEA and NTPC in Vientiane on November 29, 2004. Translated versions of these documents andor substantial summaries were prepared in Lao and made available in Vientiane and Nakai. Annex 13 provides details on the disclosure of project documents. F. Other Safeguard Issues DamSafety Review Panel 72. Inaccordance with the Bank's Policy on Safety of Dams (OP 4.37), the DSRP which has been advising G O L during project preparation will be retained during implementation. The panel will consist of three members covering the following disciplines: (i)dam engineering; (ii) geology and geotechnical engineering; (iii) hydro-mechanical works. The design documents that will be used for construction (Reference Design) are under review b y the DSRP. The panel i s expected to convene and provide its advice and recommendations on the final edition of the Reference Design in April 2005. Provision by the DSRP of its advice and recommendations on the final design of the dam scheme and on the operations and maintenance plan i s a condition of effectiveness for the project. The documents constituting the "Owner's Requirements", A 167 consisting of three volumes of contain all the information necessary for an operations and maintenance (O&M) plan. Inparticular all the design criteria are clearly reported, along with the design assumptions that influence the safety of the scheme. The outline of the O&M Manual and detailed scheduling for "Submissions and Reviews of Draft Operating Instructions and Procedures" during project implementation are available, thus constituting a preliminary outline of the Dam Safety Plans. Following the obligations contained in the Owner's Requirements, integration and updating of the plans will take place during project implementation. The Head Contractor Construction Plans will contain benchmark dates for dam safety relevant events (such as final setting out of dam axes, dam foundation preparation completion (Nakai, regulating dam), quarry acceptance for production - aggregates and earthfill -, etc.). Any modification to those dates will be timely communicated to the Lender Technical Advisor because their presence may berequired on site at those dates. RiparianIssues 73. In accordance with the Bank's Policy for Projects on International Waterways (Operational Policy 7.50), notification to riparian countries has been carried out. In the case of countries that are members of the 1995 Agreement on the Cooperation for the Sustainable Development of the Mekong River Basin (Thailand, Cambodia and Vietnam) letters dated September 2001 and October 2003 from the GOL were forwarded through the Mekong River Commission (MRC) Secretariat. The Secretariat also discussed the project within its Joint Committee, which i s comprised of high ranking representatives from the Governments of all riparian countries. N o concerns were raised in these discussions. In addition, direct notifications were sent to the People's Republic o f China and the Republic of Myanmar, countries which are not parties to the 1995 Agreement. In the notification letters, the Lao PDR Government indicated that the NT2 hydropower project would not result in any substantial change to the discharge pattern in the Mekong River and provided copies o f technical drawings and the design of the proposed dam and hydropower plant. Inaddition, in 2004, a Cumulative Impact Assessment was conducted, disclosed and made available to the MRC Secretariat and riparians. 74. Following the notification process described above, the Lao PDR Government has received: (i) a no-objection letter from Vietnam (dated February 18, 2004), (ii) support for the Nam Theun 2 project from Thailand (letters of January 14 and 16, 2004) (iii) a no-objection letter from China (dated October 23, 2003); and (iv) a no-objection letter from Myanmar (dated October 30, 2003). The Kingdom of Cambodia raised initial concerns and requested the Lao PDR Government to prepare additional studies before it would be in a position to provide its final response to the notification. The Government provided additional information, including a copy of the CIA. Through a letter dated December 22, 2004, the Cambodia National Mekong Committee advised the GOL that it was satisfied with the additional information provided and, consequently, provided its no-objection to the project. DisputedAreas 75. The policy on Projects in Disputed Areas (OP 7.60) i s triggered because the power transmission line crosses the Mekong at a point where the borders of Lao PDR andthe Kingdom of Thailand are not yet demarcated. The first design o f the project included buildinga suspension tower for the transmission line on a small island. Sovereignty over the small island in the middle of the Mekong River i s disputed between the two countries. To avoid border issues, it was agreed A 168 that suspension towers will be built on each bank of the Mekong. This is reflectedin the PPA endorsedby boththe GOL andthe Kingdomof Thailand. The Ministryof ForeignAffairs of the Government of the Kingdom of Thailand has confirmed this through a letter dated January 16, 2004. A 169 Attachment 1 of Annex 12 Safeguard Documentation 1. The Environmental Assessment and Management Plan (EAMP) provides a detailed analysis of baseline conditions and potential environmental impacts of the project. The EAMP examines impacts that are likely to occur during the construction and operations phases, and covers all project components, including the dam and reservoir, the hydropower generating facilities, tunnels, regulating ponds, associated water conveyance structures, transmission system, and ancillary development works such as improvements to the regional road network. It describes the proposed mitigation programs, including institutional responsibilities, monitoring and evaluation arrangements, timelines and budgets. Technical annexes in the EAMP describe provisions of sub-plans to be implemented as part of the overall mitigation measures, such as spoil disposal plans, quarry management plans, site specific environmental plans, cultural property management plan, worker health and safety measures. It also describes the adaptive management approach to be followed for detailed design of programs, and specifies implementation and monitoring arrangements. 2. The Social Development Plan (SOP) comprises four Volumes: (i)Introduction and Cross-Cutting Issues; (ii) Nakai Plateau Resettlement Action Plan (RAP) and Ethnic Minorities Development Plan (EMDP); (iii)Downstream EMDP and Resettlement and Livelihood Restoration Program; and (iv) Project Lands Resettlement (Acquisition and Compensation) Plan, including an EMDP for land acquisition for Project Civil Works and Downstream Channel, and the Construction Phase Social Management Plan for construction-related impacts including work camp and camp follower management The SDP defines entitlement packages for affected persons, livelihood development programs, public health and community development programs. It also describes the participatory process for detailed design of programs, grievance mechanisms, monitoring and other aspects of the implementation arrangements. 3. The Ethnic Minority Development Plan (EMDP) for the plateau identifies and addresses the special needs of ethnic minority communities that live on lands that will be inundated by the reservoir. It i s an integral part of the SDP and describes the socio-economic background of the various groups, as well as the consultation process followed, the feedback and recommendations provided, and mechanisms for dealing with specific issues pertaining to the ethnic minorities during project implementation. Similar EMDPs have been prepared to address ethnic minority needs inthe SEMFOP and in the plans for the downstream areas and project lands. 4. Social and Environmental Management Framework and First Operational Period (SEMFOP) addresses the special conservation requirements of the project's watershed area, comprised of the Nakai Nam Theun NPA and the corridors which link it to two adjoining protected areas (Him Nam N o NPA and Phou Hin Poun NPA). The SEMFOP provides detailed background information, mitigation strategies and an operational management plan for an initial eight-year period. The SEMFOP presents a long term vision for managing the development of the Nakai Nam Theun NPA. It i s based on a broad consensus building approach involving the informed participation of communities living in and near the NPA. The first operational plan includes programs and activities such as land use planning, habitat monitoring, and development of alternative livelihoods. The plan also includes a process framework for determining and compensating for any restrictions on access to natural resources for local communities, if needed. A 170 It provides budget and human resource requirements, implementation responsibilities, and performance monitoring indicators which will be used to evaluate the effectiveness of the program. 5. The Head ConstructionContractor Environmental Management and Monitoring Plan (HCCEMMP) specifies all of the requirements that construction contractors and sub-contractors will have to meet. The HCCEMMP comprises three sets of documents: (i)a management framework document, outlining broad responsibilities and expectations; (ii)19 sub-plans, providing thematic guidelines which specify requirements in areas such as waste management, spoil disposal, erosion control, dust control, etc.; (iii)Site-Specific Environmental Plans (SSEPs), which each contractor and sub-contractor will be required to prepare, describing the company's obligations at each site. Review and approval of each SSEP will be the primary responsibility o f the HCC and NTPC's EMO. GOL will not be required to approve every SSEP. Rather they will approve the overall approach and will review the first six to eight SSEP prepared for the project. Thereafter, G O L will audit quality and performance on an annual basis usinga sample of SSEPs. 6. Concession Agreement (CA) defines the detailed GOL and developer commitments consistent with the safeguard documents. In particular, Schedule 4 of that agreement describes all technical, financial and institutional requirements agreed between the developers and the GOL relating to their environmental and social obligations. 7. Analysis of Alternatives. The project's overall impact assessment included a comprehensive review of the alternatives considered at various stages of sectoral planning and project design. An initial Economic Impact Study of the NT2 Dam project was conducted by Louis Berger (1997). This was followed by a detailed analysis of alternatives to NT2, carried out by LahmeyerrWorley International (1998). This analysis took many factors into consideration, including the development of alternative power generation options both for Thailand and Lao PDR. The LahmeyerrWorley study also evaluated the possible alternative sequencing of hydropower development within Lao PDR and alternative configuration options for NT2. A supplemental analysis of the hydropower sector was completed b y Worley International (2000), using a multi-variate analytical framework to assess and compare the relative environmental and social impacts of developing alternative hydropower sites within Lao PDR. These studies were further supplemented by the Power System Development Study, carried out by MaunsellLahmeyer (2004) and the World Bank's Country Economic Memorandum, which discussed potential sources of growth for Lao PDR (2004). 8. Strategic Zmpact Assessment of the Lao Hydropower Sector. A Strategic Impact Assessment for the Lao Hydropower Sector was undertaken in 2004 in order to (i) consolidate, update and expand previous work on environmental and social issues in hydropower planning, project preparation and implementation; (ii)clarify the broader issues faced by hydropower development in Lao PDR; and (iii) develop strategic priorities for improving the management of environmental and social issues within the sector. The study serves as an advisory document to the various stakeholders in the hydropower sector including GOL, donors, financiers, NGOs and hydropower developers. Its key results are summarized in Attachment 5 o f this Annex. 9. CumulativeZmpact Assessment. Combined with existing hydropower facilities as well as with other likely regional development projects, the NT2 project could create synergistic or cumulative impacts well beyond its immediate area of influence. While the latter impacts are A 171 addressed in detail in the core safeguard documents, a comprehensive assessment of regional and cumulative impacts was also carried out, covering the broader project area andthe Mekong River Basin, including segments of the basin in riparian countries. The key results of the analysis are summarized in Attachment 5 of this Annex. 10. Other Technical Studies. The environmental and social impact assessment has benefited from a diverse array of baseline surveys, studies, and analytical notes. In some cases (for example, fish surveys), the work undertaken for this project has generated new scientific information. The full range of studies and surveys i s described inthe EAMP, SDP and SEMFOP. A 172 Attachment 2 of Annex 12 Summary of EnvironmentalImpacts and Mitigation Zone Area Overview of Key Impacts Mitigation Measures Characteristics NakaiPlateau l a I Inundation I Area below 538mon I Loss or conversion of riverine and I Implementation of SEMFOP as a Area the Nakai Plateauto be terrestrial natural forest habitats compensatory measure(WMPA). inundated by the due to reservoir flooding and Programto manageterrestrialanimals in Reservoir. vegetation clearanceand the inundation area and a transitional Approximately 450 km' construction activities. strategy for reservoir impoundment reservoir surface area. (NTPC). The size of the reservoir Wildlife programincluding inventory, will fluctuate studies for 14 species, monitoring and significantly throughout public education (WMPA). the year. Species managementprograms for the Constructionof Asian elephant. ancillary works Management of wetlands on plateau (resettlement sites, after inundationincluding species- saddle dams and access specific programs for the white winged roads). duck. Management plan for native pine species (WMPA). Siting of ancillary works to minimize habitat conversion (HCC). Management of wetland habitat created by reservoir in the NNT-PHP Corridor (WMPA). Reservoir ecosystemcouldbe Pre-impoundment salvagelogging and adversely affected by invasion of firewood collection (EMU). noxious weeds, algal blooms, and Water quality monitoring (EMO). water quality which would impact Restrictions on introductionof exotic managementof fishproduction. fish species (WMPA). e Risk of sedimentation inreservoir Fisheries management plan (RMU). ifwatersheddegradation Reservoir management (Reservoir accelerates and leads to increased Management Committee). erosion. Watershed management to reduce Water quality issues especially in sedimentation and pesticide runoff first years where organic matter WMPA). and nutrients m y be at high levels. Controls and monitoring of post- Modifications to hydrology and impoundment logging inreservoir and fisheries O f tributary Streams to the watershed areas (WMPA). Nakai Plateau. Enforcement of hunting, NTFP Indirect effects of ancillary works, collection, and use of explosives and construction work camps and other chemicals inconstruction work camps projectrrelateddevelopment inthe (HCC). area. Control of buming of vegetation and shifting cultivation in the resettlement sites (HCC). Effects of inundationand Physical Cultural Resources(PCR) consmctiononphysicalcultural management plan covering: resources. Movement of PCR from inundation zone. `Appeasement' ceremonies for abandoned spiritual sites. Integrationof measures with resettlement plan as appropriate. Precautionary measures to present theft of movable PCR. Implementation of `chance-finds' I procedures A 173 Zone Area Overview of Key Impacts Mitigation Measures Characteristics I I Use of Pesticides, herbicides in I managementplan will define measures I right of`ways. Pest(HCC, EMU,MU). Resettlement 208km' area along Indirect effects of ancillary works, Area southem rimof Nakai construction work camps and other Reservoir selectedfor project-related development inthe resettlement following area. consultation with Use of pesticides,herbicides, (and Pest managementplan will define affected households. fertilizers) in resettlement sites and measures (HCC, EMU,RMU). Vegetated with mixed other purposes in plateau. Proper waste treatment facilities will be broadleaf and Increasedpressure on land due to constructed inresettlementvillages. coniferous forest, dry agricultural intensification. Shifting agriculture will be prohibited. evergreenforest, Pressureon wildlife and aquatic Protection of susceptiblesoils with unstocked forest and resources. seeding and mulch. agricultural areas. Increasedwaste water. Host population Physicalcultural resources impact Primarily in of assessment work pending. Nakai Tai and Nakai Neua. District headquarters,Ban Oudumsouk i s also located in this area. Currently auprox. 520 NT2Watershed Practice ofpioneering shifting ns andprogramto reduce cultivationin area threatening threatens species inthe area. yields allowed by inhabitants (WMPA). Ban on huntingby construction workers ection basedon lowedby residents there are some gardens. A 174 Overview of Key Impacts Mitigation Measures Characteristics assessment work pending. 3b )own-stream Includes Downstream Construction land acquisition will Head Construction Contractors 2hannel Channel from the impact rice paddies and will Environmental Management and Regulating Damto the requiremodification of the Nam Monitoring Plan subplans to address Xe BangFai Phit channel. construction related impacts (HCC). confluence. Locationof spoil disposal sites, Lining of downstream channel to prevent Includes adjacent areas placement of embankments, erosion. that will be modifiedas bridges along the DC and the Physical Cultural Resources(PCR) part of construction of elimination of some wetland areas managementplan covering: the Downstream at the lower end of the DC. PCR from the impact zone. Channel. Variable discharge to the D C and ---- Movementof Precautionary measures to present theft of the quality of water releasedfrom movable PCR. the power station. -- Implementation of `chance-finds' Potentialerosion. procedures. Physicalculturalresources impact assessment work pending. NamPhit. Loss of fish and aquatic life due to Compensation program livelihood the lower Nam Phit abovethe models formulated with estimated costs confluence with the XBF will quantified. become an extension of the downstream channel with higher year round depth and velocity. 3c yam Kathang Covers Nam Kathang Zone will not be affected by any Aeration through regulating dam release and riparian landfrom increasein discharge. structure (NTPC). the RegulatingPondto Environmental issues include the Water quality monitoringprogram its confluence with the quality of water releasedfrom the (NTPC). Xe Bang Fai. Regulating Dam. Adaptive management of regulating Includes approx 1,632 - Oxygen levels will be affected and pond operation (NTPC). households within 23 may affect fisheries. villages. 3d Upper Xe Zone extendsfrom the Increaseindischarge and temporal Adaptive management of regulating BangFai confluence of the Nam changes indischarge inXe Bang pond operation (NTPC). Kathang and the Xe Fai. Water quality monitoring program BangFai to the Erosionof river banks. (NTPC). Sayphou Xoy Ridge Loss of domestic water supply. Compensation program for impacts on about 25km Changes in water quality. fisheries, water use and assets (NTPC). downstream of Effect on land use along river bank. Riverbank protection will be providedto Mahaxai. Impacts to imgation infrastructure. protect buildings such as pagodas with 24 villages are located Effects on fisheries due to water other physicalassets movedinMahaxai along the river reach. flow, quality, and temperature. area. Restrictionson crossing the river. Wells and other water supply systems Increasedflow during dry season will be providedinimpactedproject area may affect the transport across for domestic needs. tributaries and migration of Inigation works will be revised to be mammals and other wildlife. able to accommodatehigher water levels. Alternate transport via boats and feny will be providedwith culvert bridges established at some points to - accommodate local road transport during the dry season. 3e Middle Xe Area between Sayphou Impacts similar to Zone 3d (Upper Adaptive managementof regulating BangFai Xoy Ridge and Road 13 Xe Bang Fai) but severity of pond operation (NTPC) crossing; includes 12 impact expected to be less due to Water quality monitoring program villages. distance from Downstream (NTPC). - Channel and larger size of channel. Compensation program for impacts on fisheries, water use and assets (NTPC). 3f Lower Xe Covers approx. 500km' Flood duration, depth and extent New stretchesof embankments will be BangFai from its confluence with will be modified becauseof constructed, existing flood control and the Mekong up to the diversion of water from Nam drainage sluice gates will be modified Road 13 crossing: Theun into Xe BangFai- with most and new ones constructed to delay includes approx. 70km concern over duration where overtopping and flooding of paddies, of river. significant increased crop loss thereby, to a large extent, maintaining Area i s fairly densely could result due to longer the pre-project situation. populated with some 53 inundation. Also some new areas - A 175 Overview of Key Impacts Mitigation Measures Characterlstics villages and approx. I 3-4 percent of existing normally I 40Okm' of rickpaddy flooded area will be inundated - fields; it is amajor area though for very short periods as of rice production for they are mostly on the fringe of the Khammouane Province. flooded area. Zone experiences natural flooding almost every year and i s hydraulicallycontrolled b; the Meking. Transmission Extends from bridge Constructionimpacts including Head Construction Contractors Lines over Xe BangFai on noise, air pollution, and water- EnvironmentalManagement and Road 13 to Savannakhet related issues such as run-off and Monitoring Plan subplans to address along the route of the drainage. construction related impacts (HCC). transmission line that Habitat loss due to right of way Siting of transmission lines to minimize will deliver electricity clearanceand maintenance. potentialimpacts (HCC). to Thailand. Restoration and maintenance of transmission line right of way (NTPC). Impacts of herbicides usedto Pest managementplan (HCC). maintain transmission line right of Healthimpacts of exposureto Restriction of new settlementsunder EMRfrompower-lines. project transmission lines (NTPC). Physical cultural resources impact assessment work pending. Road to Consists of area along Habitat loss. HeadConstruction Contractors Thakek the roadbetween Construction impacts including EnvironmentalManagement and Mahaxai and Thakek noise, air pollution, and water- Monitoring Plan subplans to address along which 115kV related issues such as run-off and construction related impacts (HCC). Transmission line drainage. passes. Physical cultural resources impact I a s s e l Downstreamof D ninNam Theun-Nam Kadi. ;Basin ~ 4a NamTheun Riparian land along Impacts are mainly causedby Water quality monitoring and ecosystem Downstream NamTheun from Nakai changes inthe flow regime with a modeling program (EMO). to Theun Dam to headwatersof possible reduction of fishery Adaptive management of riparianflow Hinboun TheunHinboun habitats and productivity. and complementary releases (NTPC). Head pond reservoir approx. 32km Some ethnic minorities will be Construction of the release structure to downstream. affected. release water fromthe top and using an Muchof zone is Minor effects on riparianhabitats, aerating cone-valve (HCC). includedinthe NNT- riparianreleasesfrom Nakai Dam Stream channel landscaping. Phou HinPoun and the plants and animals that Stream channel landscaping. Corridor. * inhabit the area. Adaptive management of riparianflow Nam Phao discharges Water quality inhighly modified and complementary releases (NTF'C). into Nam Theun approx NamTheun. Compensationprogramfor fishloss 11.7kmdownstream of Changes in sediment transport. throughseveral livelihood restoration the Nakai Dam. Aquatic habitat loss and physical options has been estimated with costs No established villages barriers to fish migration due to quantified. or permanent reduced flow in the NamTheun Stream channel landscaping. settlementsin the zone, River. Adaptive management of riparianflow however some use of As a result, fish catch in the Nam and complementary release (NTPC). the river by villages Theun downstream area will be close by. Management of Corridor area (WMPA). reduced. Effect of reducedflow and suppression of seasonal changes in flow inCorridor area on terrestrial vegetation and animals Reduced flooding. A 176 - Area Overview of Key Impacts Mitigation Measures Characteristics 4b Down-stream I Includes Theun I Discharee to the Nam Kadine will .. I GOLis formulating a NamTheunbasin of T h e m I I Hinboun Reservoir and be limited to a minimumriparian management plan to take into account Hinboun a riparianarea along the release of 5m3.s from about 120- and mitigate the impacts of all existing Reservoir Nam Kading that 175 days per year from the Theun and plannedhydropower projects. potentially stretches to Hinbounreservoir to the Nam the Mekong. Mouan at a distance of amroximatelv 36km below the 4c of BanLak Sao to construction includingnoise, air EnvironmentalManagement and approximately the pollution, and water-related issues Monitoring Plan subplans to address intersectionof Road 8b such as run-off and drainage. construction related impacts (HCC). will create issues relatedto waste Includes quarry to be disposal,healthimpacts, resource opened at PhouPhako use and cultural issues. MekongRiver 5a Mekong River Area of Mekong Reductionof wet season flow. Preliminary assessments indicate the betweenNam between its confluences impacts onhydrology would be minimal; Kading and with the Nam Kading however, this will be monitored in Xe Bang Fai and Xe Bang Fai, plus coordination with the MRC during the consideration of the operation of the NT2 project. 500kV Transmission Line crossing immediately north of Savannakhet. 5b Mekong River Mekong downstream of Similar impacts as 5a but less Downstream Savannakhet. significant. of Xe Bang Small changes in seasonal water Fai levels inTonle Sap: 3 cm decrease inlake levelinwet season (out of 7-8 m) and 2 cm increaseindry season (out of 0.9 mdepth). A 177 Attachment 3 of Annex 12 Summary of SocialImpacts and Mitigation Zone Area Overview of key Impacts Mitigatlon measures social characteristics Nakai Plateau Affected population: Inundation of residential areas Social Development plan (SDP, Volume 2) Area and approximately 6,200 for 6,219 persons. includes: Resettlement people. Loss of livelihoods, land and Programs designedto restore and Area Ethnicitv: 5 main ethnic resources leading to change in improve livelihoods of the displaced minorities: Brou (40 agricultural practices and high population. percent), Tai Bo (40 risk of further impoverishment. Resettlement sites and replacement percent), UplandTai (11 L o s s of residential houses and housing to be provided; local customs, percent) Vietic (6 percent) sites. architecture and ceremonies and Sek (1 percent). Loss of community incorporatedinto new sites and However distinctions infrastructure. relocation process. between groups are Community infrastructure to be somewhat blurred. Possible change in social improved. Livelihoods: Swidden rice, organization leading to social fish, livestock, hunting and disruptions and increaseof Change insocial organization gathering forest products - vulnerability and insecurity. minimizedby maintaining and all primarily for household Change or reduction of ancestral strengthening existing village use. Inrecent years or spirit territories. organization and moving within spirit increasedexploitation of Disruption and changeof territories to the extent possible. forests for marketable communal landtenure systems. New, improved tenure arrangements, products. Only 17 percent Public health impacts associated including household plots and of families are able to with the resettlement program. communal resourceagreements. produce sufficient rice for Adverse impacts, including Working with existing local the full year. health impacts, associatedwith institutions. Income: According to the construction camps. Capacity building and institutional National Statistics Office set-up to enablecommunities and survey of 1998, annual GOLto implement the programand average cashincome of address social disruption. US$225 per household and Plan to improvehealth infrastructure I total average annual and practices. household income of Management measures to be US$450 (cash and imputed developed for the construction force income). and the camp-followers. Additional support to vulnerable communities and households. A 178 Protected About 5,800 people within Potentialrestrictions on current Management plan (SEMFOP) has been Areas (NNT the NPA. human access to naturalresources developed, including: and Ethnicitv: Diverse mix and current resource utilization Cultural appropriate community Corridors) comprising 3 main ethnic practices of ethnic minorities, development to support the well being minorities: Brou (53 leadingto disruption of current of indigenous ethnic minorities. percent), Vietic (25 percent) livelihoodpatternsand Resource agreementswill be developed and UplandTai (16 community organization, with local communities to enhance percent). impoverishment, and increase in sustainable land and resource use. Livelihoods: Shifting conflicts over limited resources. Recognitionof customary rights to land cultivation, livestock Pressureon natural resources and natural resources. raising, hunting, fishing, from workers and migrants. Livelihood development programs to collection of NTFPsand Possiblechange in social compensatefor impacts from some sedentary cultivation. disruptions andincrease of restrictions on access to natural Most householdsonly able vulnerability and insecurity. resources. to grow rice for sustainable Loss to fisheries. consumption for 2-6 Livelihood development programs will be structured to compensatefor losses I months/yr. Supplement this through cash or barter sale to fisheries. of NTFPs, livestock &fish. Income: Estimate of annual average cash income per household was US$87 in 1996 with total annual average income estimated to bedouble this per household (i.e. includes imputedincome). Downstreama PowerhouseinXe BangFai `asin 3a-b Power About 2,500 people live in Construction-related imuacts are A comuensation ulan has been develoued Station, the area. related to land acquisition and the (SDP Golume 4);o ensure compensation and Downstream Ethnicitv: The majority of influx of workers and camp followers, rehabilitationof approximately SO0 Channel the villages are Brou with including: households affectedby project lands inthe Lao-Tai and or mixed Brou area of which 90 households will need and Lao-Tai villages as Increasein prostitution, drug relocation.. Other measures include: well. abuse and criminal activities Livelihoods: Mainly exposing local communities to Public healthprograms developed, m: irrigatedrice production. public health risks (e.g. STD and including a resettlement area public Incomes are on HN)andsafety issues. healthaction plan, a regional public average three times that of Increasedpressureon natural healthaction plan and a staff health the NakaiPlateau resources from influx of workers action plan (SDP Volume 1). communities. and migrants. Separatepublic safety and health measures developed for the construction force. Regulatory measures for construction force and camp-followers are included inthe SDP. 3c NamKathang 1,632 householdswithin 23 Impacts of water use and fisheries To be included in SDP revision. villages. due to changes in water quality. Ethnicity: to be providedby NTPC in SDP revision. Livelihoods: to be provided - m:be by NTPC in SDP revision. to providedby NTPC in SDP revision. 3d-f Xe BangFai 40,600 ueoule alone XBF Impacts are mainly causedby changes An EMDP and CompensationFramework (Upper, riverbanksi2001). - inthe flow regime affected. Possible have been developed for downstream areas Middle and 30,000 persons livingin impacts include: (SDP Volume 3). Measures include: Lower) hinterland villages Loss of dry seasonriverbank Mitigation to avoid adverse impacts. seasonally travel to catch garden lands. Compensationand rehabilitation. fish or collect aquatic Reduction of fishery resources. Community development programs. products inthe XBF. Impacts on the ability to catch Additional support to vulnerable Ethnicity: Mainly Lao-Tai fish, e.g. new skills or equipment communities andhouseholds. but also severalnon Lao- required. A 179 Overview of key Impacts Mitigation measures social characteristics Tai ethnic communities, e.g. Impacts on access to river and Brou. river crossings. Livelihoods: Secure Floodingimpacts on crop yields. livelihoods, basedon agriculture (rice), animal husbandry and fishing. 84 percent of villages have imgation pumps. Off-farm income increasingly important including shops and services. Income: 2001 survey gave annual averagehousehold income of US$664.40 percent of population live below the poverty line. Ethnicity: Primarily Brou Loss of land, structures and crops Measureshave been designed (Volume villages in Gnommalathand for about 50 households. 4 of the SDP) to compensate for loss of Mahaxai Districts and Lao- Public safety along transmission assets. Tai villages to the south lines. many villages with a mix of ethnic groups. Livelihoods: Same as for Xe Bang Fai above. Income:Same as for Xe Bang Fai above. Approximately 200 L o s s of land, structures and A compensation plan and framework has Thakek households affected by crops. been developed (SDP Volume 4) to ensure project lands. Impacts of spontaneous compensation and rehabilitation of Ethnicitv: Mostly Lao-Tai, settlement. approximately 200 households affected by Brou and mixed villages. Increaseinprostitution, drug project lands. Other measures include: Livelihoods: Same as for abuse and criminal activities Public healthprogram (SDP Xe Bang Fai above. Volume 1). Income:Same as for Xe exposing local communities to public health risks (e.g. STD and Public safety measures(HCC EMMP). BangFai above. HIV)and safetyissues. Regulatory measures. Increasedpressureon natural resources from influx of workers and migrants. - Downstreamof Dam inNamTheun-NamKad g Basin 4a NamTheun INo established villages or I ImDactsare mainlv fisheries An EMDPand Compensation Planhave downstream permanent settlements losses associatedwith reduction been developed for downstream areas (SDP to Them alongthe river, however inflow. Someethnic minorities Volume 3). Measuresinclude: Hinboun some use of the river by may be affected. Mitigation to avoid adverse impacts. Headpond villages close by Ethnicitv: Compensation and rehabilitation. Some ethnic minorities Community development program. including Hmong. m: Livelihoods: Unknown Unknown 4b Downstream Population: to be provided Impacts associatedwith changes Ongoingprogram of rural development of Theun by NTPC inSDP revision. inflow from Them Hinboun by Theun Hinboun Power Company. Hinboun Dam. Reservoir Project lands compensation plan has been developed (SDP Volume 4). Main measures include: Compensation and rehabilitation. Public health program(SDP Volume 2). Public safety measures (HCCEMMP). A 180 HN)andsafetyissues. Increasedpressure on natural resources from influx of workers Mekong River 5a-b Mekong Uncharacterized. No significant impacts betweenNam anticipated. Kadingand Potentially small impacts on Xe BangFai, fisheries or flooding. Downstream of Xe Bang A 181 Attachment 4 of Annex 12 Policy Relevance to Droiect " Kev Measures Taken OP 4.01 Environmental The projectis classifiedas an EA Category The EA process assessedprojectimpacts, analyzed Assessment A project as it is likely to have significant dtemativesanddevelopedamanagementplanto adverseenvironmentalimpacts. prevent,mitigateor compensateimpacts. Cumulative andStrategic ImpactAssessments undertakento assess regionalandsectoralissues. Study findingshavebeenpublicly disclosed and discussedinvariousopen stakeholderforums. OP4.04 Natural The project will result in degradationor Compensationfor impactson naturalhabitats is Habitats conversionof approximately100,000haof providedthroughfinancing, institutional and naturalhabitats. management support for conservationof the NNT It will not resultinsignificantdegradation NPA andCorridors, comprisingan area of 395,000 or conversionof critical naturalhabitats. haof regionalandglobal conservationsignificance. It will provide aconservationoffset for lost Managementof the NNT NPA is describedin habitats. SEMFOP. A wildlife managementprogramwas developedto support conservationof key species that may be impactedby the project on the Plateau. OP4.09 Pest The introductionof new farmproduction A pestmanagementplan was developedfor the Management methodsinthe resettlementareas may resettlementprogram(part of SDP) andfor resultinincreasedpesticideuse. construction(part of the HCCEMMP). The projectmay use herbicidesfor transmissionline ROW maintenance clearing. OP4.12 Involuntary The projectwill result in the involuntary The following were prepared: Resettlement resettlementof 6,200 people as aresultof aresettlement actionplan (RAP) for the formationof the reservoir. plateauas part of the SDP. Landacquisitionandloss of assets will aRAP for the project lands andfor loss of occur on projectlands and inthe assets in the downstreamareas (partof SDP). downstreamareas. compensationandlivelihood restoration Projectoperations could leadto reduction programfor impactson livelihoods inthe infishcatchintheXBF ofupto 80 downstreamareas andinprojectlands (part of percent. SDP). As aresult of the conservation programin aresourcerestrictionprocessframework for the NNTNPA andCorridors,communities the NNTNPA and peripheralimpact zone (part in andnear the areamaybe restrictedin of SEMFOP). their accessto resourcesinthese areas. OP4.20 Indigenous All affectedcommunitieson the plateau Ethnic minority developmentplans were prepared Peoples andNPA and some indownstre& areas for these groups (part of SEMFOPandSDP). are ethnic minorities coveredby this policy. OP4.36 Forests Community-basedharvestingof forest A time-boundactionplan was preparedto achieve resourceswill be undertakenas part of the certification of community-basedforestry and forestry component of the resettlement NTFP harvestingprograms. actionplan. A monitoring programwas preparedto ensure Communitybasedharvestingof NTFPs in logging will not encroachinthese areas. the NNT NPA andComdors will also be undertaken. Loggingof the reservoirarea for clearance of the biomass prior to inundationmay presentathreat to forests innearby protectedareas. OP 4.37 Safety of Dams The projectwill involve the constructionof A DamSafety Review Panel was establishedand a large dam, as per the ICOLD definition. advisedthe constructiondesign team. The panelwil be retainedduring implementation. A 182 OP7.50International IThe project will affect timing andvolumes INotificationof all ripariancountriespotentially Waterways of flows the MekongRiver which is an affectedby the projectwas madeby GOL either intemationalwaterway passingthroughsix throughthe MekongRiver Commissionor by direct countries (includingLao PDR). contact. All five countries have expressedtheir "no objection" to the project. OP 7.60 DisputedAreas Transmission tower(s) for the project The projecthas designedthe transmissionline transmissionline were originally planned crossing such that no disputed landwouldbe used. to bebuilt on an islandinthe main stream GOL andThailandhave enteredinto agreement on of the MekongRiver,whichi s an areaof the issue as partof the power purchaseagreement. possibleterritorial disputebetween ThailandandLaoPDR. OPN11.30 Cultural The constructionworks, reservoir Surveys of the project lands were undertaken. Property formationand associatedresettlement Mechanismsto manage impactedculturalproperty programwill impact historicalsites, were developedinconsultationwith affected archaeological sites, local spirit forests or communitiesandhavebeenincludedinthe sacred sites. managementplanfor the constructionworks (HCCEMMP). A 183 Attachment 5 of Annex 12 Cumulativeand StrategicImpact Assessments A. CumulativeImpact Assessment 1. The World Bank and ADB policy both require major projects such as NT2 to evaluate the cumulative and regional development impacts of the project. Cumulative impacts refer to the combined interactions of the proposed project with other closely related existing or planned developments. When combined with other developments such as the Theun Hinboun power project, N T 2 can have more far-reaching consequences than if it were just developed as a single project. Regional impacts refer to those impacts which go beyond the project site itself, for example, the potential for the project to stimulate spontaneous population resettlement at construction camps or along improved access routes in the region. To evaluate these types of impacts a Cumulative Impact Assessment (CIA) was completed in 2004. 2. The CIA i s not seen as an analysis which would lead necessarily to direct mitigation or compensation measures within the scope of the NT2 project, since many of the effects are the result of combined activities well outside of the direct control of the project. The purpose of the C I A i s to assist national and regional planners, in Lao PDR and other riparian countries in the Mekong River Basin, to better understand the combined impacts of different activities in order to anticipate and resolve problems which may emerge inthe future. Coverage 3. Spatial. The cumulative and regional assessment looked at potential risks at different spatial scales. First it evaluated the combined effects of NT2 with other known or planned hydropower developments at the scale of the Mekong sub-basin, with particular emphasis on the effects on the Mekong main-stream andthe Tonle Sap inCambodia. The study also evaluated the possible cumulative and regional impacts in more detail at the scale of the two major drainage basins affected b y the project-the Nam TheudNam Kading drainage area as well as the Nam KathanglXe BangFai drainage area. 4. Temporal. The study evaluated impacts of development scenarios at two temporal scales-5 and 20 years for both the project area and its vicinity, and for the broader regional scale of the Mekong. 5. Assumed sector developments. Development scenarios were based on anticipated development in key sectors including hydropower, transport, irrigation, water supply and sanitation, urban development, fisheries, forestry, industry, social development and conservation. Nakai Plateauand NNTNPA 6. 5-year scenario. Impacts will be dominated by the Nam Theun 2 project, with some cumulative impacts from increased population and transport infrastructure expected, including increased pressure on wildlife and increased risk of.STDs. 7. 20-year scenario. Impacts stabilized but significant changes from baseline expected including: improved water supply and sanitation; higher population; improved health conditions; increased employment in service sector; and, increasedcultural integration of ethnic minorities. A 184 Xe BangFaiRegion 8. 5-year scenario. Impacts of operation of Nam Theun 2 project will begin to influence area with cumulative impacts including: increased wastewater flow from higher population; intensification o f agriculture; increased logging; unplanned development of Gnommalath and Mahaxai; increased prevalence of STDs; capacity of district services improved; improved food security; and improved capacity for irrigation and aquaculture. 9. 20-year scenario. Expansion of transport corridors and urbanization expected to dominate development. Cumulative impacts include: improvement of water quality problems related to reservoir and wastewater; localized water quality problems related to agricultural intensification; reduced aquatic biodiversity and fisheries; improved sanitation; substantial growth in Mahaxai, Xe Bang Fai and Nongbok; and integration of ethnic minorities in urban areas. Downstreamof NakaiDam(NamTheun,NamKadingandNamHinboun) 10. 5-year scenario. Expected to experience combined impacts of Nam Theun 2 and Theun Hinboun extension and developments associated with improvements of Route 8 corridor. Cumulative impacts include: reduced flow in Nam Kading; changes in fish migratory behavior; increased threats of biodiversity due to population increase and cross border traffic; increased deforestation; increased irrigation in Nam Hinboun; increased population in Lak Sao; and gradual integration of ethnic minorities. 11. 20-year scenario. N o further hydropower expansion expected. Development dominated b y increase intransport and activities on plateau. Cumulative impacts include: increased pressure on NPAs other than NNTNPA; increased urbanization in Lak Sao; and integration of ethnic minorities with some groups losing cultural identity. MekongRiverBasin 12. 5-year scenario. Dominant development i s expected to be hydropower in Yunnan Province, China, and Lao. InSavannakhet, Mekong flows are expected to decrease 10percent in the wet season and increase 70 percent in the dry season. At Kratie, in central Cambodia, flow i s expected to decrease 5 percent in the wet season and increase 53 percent in the dry season. Similar, but less pronounced, changes in flows are expected to occur in the downstream areas including Phnom Penh and the Mekong delta. As a result of these flow changes, the average depth of the Tonle Sap i s expected to decrease by 22 cm (from 7.6 to 7.4 meters) during the wet season and increase by 25 cm (from 0.9 to 1.15 meters) duringthe dry season. 13. 20-year scenario. Dominant development i s expected to be continued hydropower development in Yunnan, China, and Lao PDR. In Savannakhet, Mekong flows are expected to decrease 20 percent in the wet season and increase 135 percent in the dry season. At Kratie, in central Cambodia, flow i s expected to decrease 17 percent in the wet season and increase 124 percent in the dry season. Similar, but less pronounced, changes in flows are expected to occur inthe downstream areas including PhnomPenh and the Mekong delta. As a result of these flow changes, the average depth of the Tonle Sap i s expected to decrease b y 54 c m (from 7.6 to 7.1 meters) during the wet season and increase by 63 c m (from 0.9 to 1.5 meters) during the dry season. A 185 B. Strategic Impact Assessment of LaoHydropower Sector 14. The N a m Theun 2 project and other hydropower development plans developed inparallel with it will have sector-wide implications, including environmental and social impacts. As per the Environmental Assessment Policy OP 4.01, a strategic impact assessment was undertaken for the hydropower sector in Lao as part of preparation of the project. The Strategic Impact Assessment (SIA) was been prepared in order to consolidate, update and expand previous work related to hydropower and environment and to clarify the broader issues associated to hydropower development in Lao PDR. It recommends strategic actions for improvement of environmental and social management and i s intended to serve as an advisory document for the Government of Lao, private sector developers and donors active inthe hydropower sector. Coverage 15. The SIA covers sectoral issues in relation to the planned hydropower developments in Lao PDR in a 20-year perspective. It reviews the strengths and weaknesses of the legal and institutional framework; experiences with EIA in Lao PDR; Lao hydropower development planning; baseline environmental and social conditions and expected impacts of planned hydropower development; alternatives considered in hydropower development planning; and recommends mitigation measures, management programs, monitoring, consultation, and capacity building. Results and Recommendations 16. The SIA indicated that the country's basic legal and regulatory framework i s up to international standards but needs clarification of some issues. The experience in EIA development i s mixed, partially due to the recent establishment of the framework and limited government staffing and capacity. With regard to hydropower planning, while it has included environmental and social impacts, its effectiveness has been limited due to methodological issues related to valuing environmental and social costs, and the process of project development which i s largely driven by private sector project preferences. The impacts of planned projects are concentrated in two major basins with important impacts, including those on biodiversity, downstream areas, and ethnic minorities inupland areas. 17. The SIA provides the following recommendations: (i) Mitigation and compensation measures related to construction and operation: Recommends generic mitigation measures for hydropower projects including: water- related mitigation (fisheries, water quality, environmental flows) and land-based mitigation measures (erosion prevention, construction management). (ii) Compensatory development and management measures: Recommends programs for compensation for natural habitats losses, fisheries losses, forest loss, resettlement and ethnic minorities. (iii)Znitiatives for integrated water resources management: Recommends catchment management and integrated water resources planning and intact river protection. A 186 (iv) Planning and assessment of hydropower development: Recommends implementation of least-cost strategies; awarding of MOUs to developers; awarding of licenses; clarifications in regulatory framework (emergency procedures; enforcement and regulations; resettlement planning and implementation; and NPA status and definition of impact zones), and addressing ethnic minority issues. (v) Training and capacity building: Recommends capacity buildingfor STEA, provincial and district level, including methods of training and fundingmechanisms. (vi) Environmental and social monitoring, Recommends measures for establishing good baselines for EIAs; monitoring construction activities and compensation measures; and long-term social and environment monitoring. A 187 Annex 13: ConsultationandDisclosure LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 Social andEnvironmentProject A. Overview 1. The public consultation process undertaken during preparation of the Nam Theun 2 (NT2) project has provided an opportunity to engage affected people and concerned stakeholders at the local, national, regional and international levels. The principal objectives of this process have been to: (i) facilitate detailed project planning, design and implementation, by taking into consideration community perspectives; (ii)reduce negative and enhance positive community impacts from the project through the participation and involvement of directly-affected stakeholders; and (iii)increase public awareness and understanding of the project. 2. Consultations with directly-affected people, carried out since 1996, took a number of forms. These meetings were intended to both share information with affected people on the nature, scale, and timing of planned developments, as well as to solicit feedback and inputs to important elements of the Environmental Assessment and Management Plan (EAMP), the Resettlement Action Plan (RAP), Ethnic Minority Development Plan (EMDP) and the Social and Environment Management Framework and First Operational Plan (SEMFOP). These consultations were documentedby GOL and NTPC and were used to design major aspects of the social and environmental management plans. B y end-2003, NTPC and the GOL had organized several hundred public meetings and informational exchange events throughout the project area. 3. Consultations carried out since May 2004 have taken into account the lessons learned from the previous period and have been guided by the basic tenets of transparency, balance and meaningfulness. All impacts and risks, both positive and negative, mitigation and compensation measures for negative impacts and risks, general concerns of the affected population and grievance procedures were discussed. 4. In addition, a series of national and international workshops were organized, addressing questions on the basic design, economic analysis, environmental and social impacts, and proposed mitigation measures of the project. These workshops also discussed the macro- economic context for the project, including sources of economic growth and strategies for poverty alleviation available to the Lao PDR, Thai power demand scenarios, Lao hydropower development options, and management of project revenues. B. The WorldBankPoliciesandExpectations 5. Information disclosure and consultation are important to ensure development effectiveness and sustainability o f development projects. They create opportunities for informed debate, enhance transparency and accountability, strengthen public support, reduce risks, facilitate collaboration among parties concerned, and improve the quality o f project design and implementation. Disclosure and consultation are mutually supportive activities. 6. A number of policy statements describe the World Bank's expectations with regard to disclosure and consultation with affected groups and concerned stakeholders. The World Bank's A 188 Policy on Disclosure of Information (June 2002) provides detailed guidance on disclosure of project documents to the public. The goal i s to ensure that affected people and interested stakeholders have access to information about a project to improve their understanding and facilitate their participation in a meaningfulprocess of consultation. Such information should be available in a timely manner and in a format and content understandable to project-affected people andother stakeholders. 7. Consultation and disclosure of information are recurrent themes throughout the Bank's safeguards policies. OP 4.01 (Environmental Assessment) requires the borrower to disclose information and consult with project-affected groups and local non-governmental organizations as early as possible. Their views are taken into consideration before finalizing the project design. The borrower i s also required to continue the consultation process through project implementation. 8. OP 4.12 (Involuntary Resettlement) requires prior consultation on the resettlement instrument prior to finalizing project design. Affected people should be informed about their options and rights pertaining to resettlement. They should also be consulted on, offered choices among, andprovided with technically and economically feasible resettlement alternatives. 9. OP 4.20 (Indigenous Peoples) requires a similar approach with respect to the preparation of an Indigenous Peoples' Development Plan (IPDP)/Ethnic Minorities Development Plan (EMDP). A strategy for local participation in decision making throughout the project implementation period i s considered an essential element of an IPDPBMDP. OP 4.04 (Natural Habitats) further requires that the Bank take into account the views of affected groups and local NGOs when developing projects involvingnatural habitats. C. Challengesto MeaningfulConsultationinthe Lao Context 10. Lao PDR i s one of the poorest countries in the world. Only half the population can read. Seventy percent of the population are ethnic groups who speak different languages and dialects. Basic infrastructure to facilitate public access to information and services i s still limited in various parts of the country. Currently the Lao PDR has no indigenous organizations that might be viewed as the beginnings of a civil society independent from the government. Organizations affiliated to the Communist Party, such as the Lao Front for National Construction, the Federation of Trade Unions, the People's Revolutionary Youth Union, and the Federation of Women's Unions, are considered by the Government to be civil society organizations. Their functions are to help the government to "unite and mobilize the people," but they also represent villagers' interests and concerns. Members o f these organizations were, and continue to be, actively involved in consultation processes, especially at the local level. The government does not encourage local NGOs, and has limited capacity to effectively disseminate information and organize public consultation. 11. Although decision-making i s generally a top-down process in Lao PDR, the government has made recent efforts, often with international donor support, to improve its participatory planning methods and strengthen capacity of village and district-based institutions to participate in decision making processes surrounding development interventions and public planning. The NT2 project i s one such instance, having followed a consultation process unprecedented in the country in terms of its depth, duration and openness. A 189 D. Identification of Key Stakeholder Groups 12. Five target groups were identified as key stakeholders: (i) project-affected people; (ii) the government officials at the district, provincial and national levels; (iii)civil society at large, international NGOs operating in Lao PDR (particularly those in the project area), and other international NGOs with interest in the project; (iv) international financial institutions, donor organizations and private sector investors; and (v) other interest groups. These target groups were also further categorized as follows: Local. All households and villagers inthe Nakai Plateau, downstream communities inthe project area (downstream channel, Xe Bang Fai, Nam Theun, the transmission line corridor, and other areas required for ancillary facilities) who are directly affected by project implementation; Regional. Community leaders, district agencies, provincial agencies, mass organizations and businesses and contractors who have implementation responsibilities for various aspects of the mitigation and compensation programs; National. GOL ministries, other government organizations, academia, NGOs and the media; and International. Other international power utilities and dam developers, international financial institutions (such as the WB, ADB, AFD, EIB, NIB), NTPC investors and financial institutions, international NGOs, and international media. E. The Local Consultation Process UpTo 2003 13. The GOL and NTPC have conducted and documented more than 200 public meetings and consultations between 1996 and 2003. A review was undertaken o f the consultation process during this period. Most of the activities were organized during 1996-1997 period, when the basic socio-economic and cultural research was being undertaken predominantly by CARE and IUCN. Although the majority of consultations at that time were concentrated on the Nakai Plateau, other project areas were also covered, as indicatedbelow: 0 Nakai Plateau. All villages in the reservoir area were consulted and involved in the resettlement study; 0 NT2 Watershed. Twelve villages were involved in the Socio-Economic and Culture Survey in 1996; 17 sites were included in the I U C N study in 1997 of the Environmental and Social Action Plan; and 27 villages within the NNT/NCBA were involved in the information and consultation workshop in 1997; 0 Downstream channel. Twenty-one villages in Gnommalath, Mahaxai, and the upper and lower Xe Bang Fai were consulted in 1997; 0 XBF River. Twenty-four villages along the upper, middle and lower segments of the river were consulted in 1997; and 0 Transmission line corridor. Representatives of 128 villages were consulted. 14. Methodologies and techniques for public consultation were designed to suit the needs of each target audience, such as by makinguse o f visual and pictorial graphics where literacy rates A 190 were low, setting up focus groups separating males and females, and inclusion of consultation staff of different ethnic groups. In addition, NTPC conducted visits to the demonstration resettlement farm, and the resettlement village of the Theun Hinboun dam. Project documents and summaries were translated in Lao for local leaders and regional officials, and placed in the NTPCOffices in Vientiane, Nakai andThakek, andon the NT2website. 15. Concerns and recommendations of stakeholders provided through these consultations influenced the EAMP and especially the SDP (both the RAP and the Eh4DP) on such matters as the location o f resettlement villages, house design, village layout, livelihood models, compensation plan and design of the downstream channel. Nonetheless, one criticism was that the 1996-2001 consultation process was biased towards promoting the positive benefits of the project while the negative impacts and risks were largely downplayed. The consultation process did not necessarily reflect village social structure or cultural practices where decision-making is concerned. Cultural differences, languages, and facilitating skills played an important role in these meetings. Limitations lay not so much in the willingness of people to speak out, but rather in the lack of a process wherein government and project officials would be explicitly responsive to what people were saying. Given that the interaction with the government i s through district level officials from rural backgrounds,the potential for success has always been there. F. The Local ConsultationProcess Since 2004 16. Consultations carried out since May 2004 have taken into account the lessons learned from the previous period and have been guided by the basic tenets o f transparency, balance and meaningfulness. It was felt that the consultation process must be valuable for all stakeholders: villagers, the project, the private sponsors, and the government. All impacts and risks, both positive and negative, needed to be made clear at the outset. Mitigations for negative impacts and risks, including appropriate compensation, needed to be agreed upon. Grievance procedures should be firmly in place to allow affected people to appeal and resolve issues if agreements are not implemented. 17. The basic reorientation was made to promote a process where local people spoke out more and project and government officials mostly listened. Village Facilitators (VFs), selected from a cross-section of society, were trained to carry out the consultations themselves, speaking intheir own language, andproceedinginaccordance with their own cultural norms. Since a large portion of the villagers in the reservoir and watershed areas are illiterate, a range of written and graphic materials were made available for use by the VFs, including information manuals and pictorial posters. A village forum was held, involving both plenary and smaller break-out group discussions through which participants carried out a dialogue on a range of topics, aiming to achieve consensus at the village-level. At the end of the forum, there was a wrap-up meeting among the District Resource Team and VFs, where the findings and next steps, to be shared with NTPC, were discussed and agreed to. The village reports were made available through the village information centers. Subsequently, NTPC teams returned to the villages to explain the design changes to the local consultations. 18. Consultations covered all project areas: Nakai Plateau: All the 17 villages that will be inundatedby the reservoir; A 191 NT2 Watershed: 31 villages (through 12 consultation sessions) and four villages of the peripheral impact zone; Xe Bang Fai: 70 of the 89 villages inthe mainstream, backwaters and tributaries; Nam Theun: A representative sample of villages (15) located on the tributaries out of 40 potentially affected villages; and Project lands (acquired for ancillary works including transmission lines): All villages on sites that have already been identified. 19. The process was coordinated by an experienced Thai consultant, who trained the village facilitators and followed the process throughout. The process was also observed by an independent consultant,' well acquainted with the area and the Lao language. Both have reported on the process and attest to the unprecedented level of transparency and participation achieved. The report of the independent consultant can be found at www.worldbank.or~laont2. G. NationalWorkshops 20. Provincial and national government agencies. Because implementation of the project involves various government jurisdictions and organizations, the consultative process focused considerable attention on briefing and seeking inputs from community leaders, and from district, provincial and national government agencies. A series of workshops have been organized for government entities in order to fully inform them of the project activities as well as to inform them of their responsibilities duringproject implementation. 21. Nun-governmental organizations. While there are a number of international NGOs active in the Lao PDR, there are very few domestic NGOs working at the national level. Thus effective consultation with Lao civil society remains highly constrained. Nevertheless, the project sponsors have created numerous opportunities for international NGOs and Lao mass organizations such as the Lao Women's Union and the Lao Front for National Construction, to participate actively in the review process. This has been accomplished through specific targeted events to share information and seek input from international NGOs, and by establishing channels of communication such as websites, respondingto written inquiries, directly involving international NGOs infield research, and by organizing occasional site visits. H. InternationalWorkshopsinBangkok,Paris,Tokyo andWashingtonD.C. 22. The government, project sponsors and international financial institutions also organized workshops to brief international interest groups including conservation NGOs, human rights groups, government representatives, other financial institutions, parliamentarians, and the media, in Thailand, France, Japan, and the United States. These meetings took place in August and September 2004 and attracted nearly 500 participants. The workshops were designed to share important information about the nature of the project (including aspects pertaining to the rationale for the project, the cost-benefit analysis, and management of project revenues), and to discuss the issues and the actions taken to minimize or eliminate potential risks associated with the project. The international workshops were conducted by independent moderators, who issued ' Jim Chamberlain, who is a Lao-based Social Anthropologist. His final report is available at www.worldbank.org/laont2. A 192 reports on the proceedings and a summary of the discussions in each venue. A full discussion of these consultations - the times, places where meetings were conducted, participants and issues raised and discussed - can be found in the three safeguards documents. Workshop summaries and moderator reports can be found at www.worldbank.org;/laont2. I.ChangestoProjectDesign 23. Feedback from local consultations and from national and international workshops have significantly informed and modified project design. The EAMP (Chapter 5), SEMFOP (Chapter 2) and SDP (Volume 1 Chapter 4, Volume 3 Chapter 6, and Volume 4 Chapter 6) document the changes introduced to the project. Some specific examples are as follows: project works have been sited so as to minimize resettlement and environmental impacts; resettlement sites have been chosen in response to preferences expressed by the affected population on the plateau; a regulating pond has been included in the overall scheme and will be operated in a way which minimizes daily fluctuations in the downstream area; aeration structures were included to improve water quality in downstream channels; the powerhouse and reservoir will be operated so as to limit natural over-bank flooding inthe Xe Bang Fai. An adaptive management program has been introduced, and will be based on extensive monitoring and adjustment of program design as needed duringimplementation. 24. The local consultation process has confirmed general community support for the project and for a diverse package of livelihood options. It has documented local preference with respect to sensitive cultural sites such as spirit forests, and has helped to identify local priorities in areas such as flood protection, electricity supply, fisheries etc. The consultations also helped clarify rights and responsibilities of various stakeholders, and the government has accordingly enacted specific legal measures to protect such rights of the affected people. Change matrices that were prepared by the developer have been verified by the independent consultant, and have been included inthe draft final version of the safeguard documents. J. Disclosure of Information 25. The draft safeguards documents (EAMP, SDP, SEMFOP and SESIA) and several technical, economic and contractual documents have been widely disclosed in country at the STEA, and NTPC public information centers, in Nakai, Thakek and Vientiane, and through the World Bank's InfoShop and Public Information Centers. They were also posted on the Bank's website (www.worldbank.org/laont2), that of the Lao National Energy Committee (www.powerinmrogress.org,) and that of NTPC (www.namtheun2.com). Translated versions of these documents andor substantial summaries were prepared in Lao and made available in other languages. Attachment 1 to this Annex provides further detail on the disclosure of specific documents. 26. Notification informing the public of the availability of these documents, inviting public comments and announcing public meetings, was made in a timely manner. For international stakeholder meetings, documents were made available 30-90 days in advance. In addition to making available technical documents, the project sponsors and GOL have also provided illustrations and graphics in an easy-to-understand form, given the ethnic diversity and low levels of literacy of population inthe project area. A 193 K. OngoingConsultationDuringProjectImplementation 27. Public consultation and disclosure of environmental and social information will continue to be undertaken during project implementation, The consultative process followed during project preparation i s part of the overall project communications and participation strategy. The SDP, SEMFOP and EAMP explain the participatory planning, implementation and monitoring methods that will be employed in different areas of the project. There are specific plans for continuing a proactive program of public meetings and dissemination of information through the project implementation period. Participatory planning processes (such as FLUPAM in the NT2 Watershed, village planning inthe plateau and participatory design of the downstream program), local radio programs, resettlement committees at the local and provincial levels and other mechanisms will continue to play key roles in providing information and gathering inputs from affected people. It should also be noted that the consultation process that has been put in place since May 2004 i s an adaptive learning process. It both (i) continually revises and adapts itself to better meet the needs of villagers; and (ii) learns from on-going discussions and the perceptions of the affected persons, providing inputs to project design. It will be continued after financial close and effectiveness of the Bank operation, as the project moves into the detailed design and implementation phase. 28. The GOL plans to use the UNDP-supported Roundtable Mechanism for monitoring the National Growth and Poverty Eradication Strategy and progress on the NT2 project. It also plans to convene periodic meetings of co-financiers for review o f (i)physical progress in implementation of project investments; (ii) of monitoring and evaluation of social and results environmental impacts and outcomes; (iii) measures taken to address unforeseen events; and (iv) other dimensions of the project. In addition, periodic workshops at the national and international level will be conducted involving the international donor community and civil society to allow exchange o f information and discussion of the project. In support o f these processes, the government has plans to further improve its capacity in the area o f public communications and media relations in respect of the project and will, among other actions, improve its project website and ensure that it i s provided with up-to-date information on the project. A 194 Attachment 1 toAnnex 13 NAMTHEW 2 HYDROELECTRIC PROJECT DocumentsAvailable inthe PublicDomain (March2005) Document Preparedby Date posted Location andlor website Summary description 2ovt of Lao Early August Zxplains Lao's povertyreduction PovertyEradication PDR andWorld 2004. Site: mdgrowth strategy Strategy. Bank. www.uoweringurogress.org World Bank. Executive www.worldbank.org/Laont2 Reviewsthe options availableto Study (Country Summary mid- .hecountry to spur economic Economic August 2004. growthandreducepoverty. Memorandum). Examinesthe pros andcons of iifferent uses of naturalresources FullReport includinghydropower. December2004. 3. DecisionFramework World Bank. Beginning-July www.worldbank.ordLaont2 Explainsthe Bank's position ~ ~~ ~~ for the proposedproject 2002. regardingits participationinthe and subsequent NamTheun 2 project andoutlines ManagementMission areas where progressis neededfor Aide Memoires. projectprocessing. IARDS REPORTS 4. summary Independent Consultationdraft: Englishcopies at World Bank This summarizes the below- Environmentaland Consultantfor English-July2004 Infoshop; EnglishandLao mentionedsafeguardsdocuments. SocialImpact NTPC and Lao-August2004 hardcopies at STEA-PICand Assessment (SESIA)in Government of Thai-AuguSt 2004 NTPC-PICinVientiane; English,Lao, Thai, and LaoPDR. Japanese-July English andThai hardcopies Japanese. 2004 at World Bank-PICin Bangkok. Final draft: November29, 2004. All languageversions on www.namtheun2.com(links from www.worldbmk.org); English andLao versions on Distributed to www.uoweringurogress.org Board: December 13, 2004 A 195 Document Prepared by Date posted Location and/or website Summary description I I Independent Consultationdraft: lardcopies at World Bank 'his provides an assessmentof Assessment and Consultantsfor mainchapters-end nfoShop,STEA-PICand mpacts associatedwith the ManagementPlan NTPC. May 2004; \ITPC-PICs inVientianeand irojectand developmentof plans (EAMP). complete qakai; andWorld Bank-PIC o minimize, mitigateor document-June nBangkok. :ompensatefor these impacts. 2004. www.namtheun2.com(links Final draft: iomwww.worldbank.org,) November 29, md 2004. www.poweringproeress.org Addenda: January 26,2005. r 6. SocialDevelopment NTPC Consultationdraft: CIard copies at World Bank r h i s describesthe planto manage -- mainchapters: [nfoShop,STEA-PICand ;ocialimpacts including those endMay 2004; VTPC-PICs inVientianeand .elatedto resettlement,healthand Vakai; andWorld Bank-PIC lownstreamimpactsinthe Xe -- complete inBangkok. BangFai and to manage special document: mid ssues relatedto ethnicminorities. July 2004; Lao chapter summaries at STEA-PIC andNTPC-PICin Finaldraft: Vientiane. November 29, 2004. www.namtheun2.com (links from www.worldbank.orp) Addenda: and January 26,2005 www.uoweringurogress.org Independent Consultationdraft Hardcopies at World Bank This describes the planto manage Environment consultants for (complete InfoShop, STEA-PIC and the Nakai-NamTheunNational Management Watershed document): NTPCs-PICinVientiane and ProtectedArea and its corridors. Frameworkand lst Management end July 2004. Nakai;andWorldBank-PIC I t s conservationi s providedby OperationalPlan andProtection inBangkok. the projectas acompensationfor (SEMFOP). Authority. Finaldraft: a portion of the environmental November 29, www.namtheun2.com (links impacts relatedto the project. 2004. from www.worldbank.org,) and www.uoweringurogress.org Independent First sevenreports: www.namtheun2.com The POEadvisesthe Govemment Environmentaland Experts. September 2004. of Lao PDR andhas so far issued SocialPanelof Experts. gthReport- eight reports since 1996. February23,2005. Independent First four reports: www.worldbank.orgflaont2 The IAGadvises the Presidentof Advisory Group. Experts. September 2004 the World Bank andhas so far issued five reports since 1996. 5'h Report-March 7,2005 A 196 Preparedby Date posted Location and/or website Summary description ~~ Document I 10.CumulativeImpact GOIJMIH with December 16, www.namtheun2.com(links inalyzes the cumulativeimpacts Analysis: Contributions independent 2004 Fromwww.wor1dbank.org) Ifdevelopments alongNam of NT2 project (CIA). consultants and rheun,NamKadingandMekong www.poweringprogress.org iivers. Hardcopies at STEA-PIC and NTPC-PICinVientiane; and - World Bank-PICinBangkok. 11.Strategic Impact GOL (MIH) December 16, www.namtheun2.com(links 4ssesses the energy sector Assessment (SIA). with 2004. from www.worldbank.org) mpacts on the environment. independent and consultants. www.uoweringorogress.org Hardcopies at STEA-PICand NTPC-PICinVientiane; and World Bank-PICinBangkok. I Fees, commissions, expenses or other financing costs (includinginterest) unrelated to the IDA-Guaranteed Facility or the IDA Guarantee; k Development fees; and k Any payment inor expenses incurredin,or inrespect of, goods or services supplied from the territory of any country, which is not a member of the International Bank for Reconstruction and Development (" ISRD") or IDA. Availability Period The period ending the earlier of 72 months from signing of the IDA Guaranteed Facility agreement or 66 months fromfinancial close. Tenor: 16.5 years Repayments: 24 semi-annual installments commencing on the first repayment date; 8 months grace after commercial operations date. Margin: 2.00 YOper m u m Interest Rate: Applicable LmOR plus the Margin Interest Period: Semi-Annual Up-front Fees: 1.75 YOof the LoanAmount CommitmentFee: 0.45 YOper annum of aggregate undisbursedLoan Amount A 208 IDA GuaranteedFacility Agent: Fortis Bank (Subject to Final Confirmation) Debt Service Reserve Account: To cover a minimumof 6 monthsprincipal andinterest Conditions Precedent to each As specified inthe common conditions precedent for all Disbursement: commercialloan facilities (to be incorporated into a Common Terms Agreement -CTA) provided to the Company. Inaddition, it shallbe a conditionprecedent to eachdrawdown under the IDA-Guaranteed Facilitythat the IDA Guarantee remains infull force and effect. Goveming Law: English Schedule 1. INDICATIVE TERMS AND CONDITIONS OFTHE IDA GUARANTEE Borrower: The Company Beneficiary: The IDA Guaranteed FacilityAgent, onbehalf of the IDA Guaranteed Lenders Guarantor: International Development Association ("IDA") Maximum Aggregate Upto US$50,000,000.00 of principalplus interest(excluding any default Liabilityunder the interest and breakage costs) accrued on such principal amount under the Guarantee: IDA Guaranteed Facility Use of Proceeds: See Use of ProceedsinIDA-GuaranteedFacilityTerms Intentionally Left Blank A 209 Scope of Guarantee: Except for Provisional Payments and Excluded Obligations (see items below), the IDA Guarantee covers any outstanding scheduled payment of principal and interest (excluding default interest andbreakage costs) (i) provided for ina bindingExpert' s determination or an arbitral award (" A w a r d ) rendered against Lao PDR inaccordance with the Concession Agreement, or (ii) undisputedby the Government of Laos (" GoL"), when the Company' s failure to make such payment ina timely manner is a direct result of GoL` s breachof its payment obligations under the Concession Agreement. Cover The IDA Guarantee is designed to cover a set of key payment obligations that GoL has agreed to undertake inthe Concession Agreement and related Project Documents, including: (a) GoL indemnity payments contemplated inthe Concession Agreement which result from events withinGoL' s control or due to GoL political/force majeure risks (defined as Lao Sovereign " Events"); (b) a Lao Sovereign Event Compensation Requirement caused by a Lao Sovereign Event; (c) a ConcessionAgreement termination payment arising out of certain events for which GoL is responsible, e.g.: (x) a prolonged (more than 24 months) Lao Sovereign Event; and (y) a GoL Termination Event; and (d) a direct payment of a CompanyChange inLaw Compensation Amount (when required under the Concession Agreement. Excluded Obligations The IDA Guarantee will specify GoL payment obligations under the Concession Agreement that will not be covered by the Guarantee, including: (a) a Compensation Payment upon termination of the Concession Agreement by reason of any General TerminationEvent (Clause 39.6); (b) a prolonged NonSovereignEvent (Le. natural force majeure event) (Clause 37.10); ( 4 a Company Termination Event (Clause 39.2); and (4 other Company defaults including failure to achieve the Commercial Operations Date due to the Company. The amount of scheduled principal and interest payments (excluding default interest) whichare indefault under the IDA-Guaranteed Facility as a direct result of a GoL Payment Defaultwill be (x) as determined ina n arbitral award (" Award") rendered against Lao PDR establishing the amount of scheduled principal and interestpayments that are outstanding as a direct result of the GoL Payment Default, or (y) as confirmed by the GoL. I f there is an ongoing dispute regarding a GoL PaymentDefault and diligent efforts are being taken to resolve the dispute, the lenders may extend the IDA Guarantee beyond the scheduled final maturity date of the IDA Guaranteed Facility (" Scheduled Final Maturity Date")o n anannual basis, for a further three (3) years after the Scheduled FinalMaturity Date, uponpayment inadvance of the Guarantee Fee on a semiannual basis. A 210 Provisional Payments: IDA will makeProvisionalPayments for scheduled paymentsif: (a) the Company, any IDA GuaranteedLender or the IDA Guaranteed Facility Agent on behalf of the IDA Guaranteed Lenders is unable (within an agreed time period) to commence or proceed with dispute resolutionin accordance with the relevant provisionsof the Concession Agreement by reason of court decision, judgment or order inLaoPDR (whether temporary or permanent, and whether commenced by GoL or arising from thirdparty legalaction) to (i) prevent or impede the dispute resolution process, (ii) have the dispute transferred to or determinedby the courts inLao PDR or (iii) otherwise pursue the dispute ina manner not consistent with the agreed dispute resolutionmechanism andnot agreedby the Company, and (b) the IDA Guaranteed Lenders and/or the Company have agreed with IDA that they will use their best efforts to resolve the dispute and the IDA Guaranteed Lenders have provided IDA with irrevocable stand-by letters of credit to repayIDA on call the amount of the provisional payment and interest thereon inthe event that the Award subsequently determines that the liability of the GoL is less than the hullamount of the provisional payment. The IDA GuaranteedLenders' obligation to repay the Provisional Payments expires after three years if dispute resolution continues to be interrupted. Non-Accelerability of The IDA Guarantee will be non-accelerable even if the underlying payment Guarantee: obligations of the IDA-GuaranteedFacility are accelerated. The IDA Guarantee will cover payment of principalandinterest payable in accordance with the originalpayment schedule applicable to the IDA GuaranteedFacility. Guarantee Related Fees: GuaranteeFee ("Guarantee Fee"). 0.75%per annumon the aggregate scheduled disbursed and outstanding principal amount of the IDA Guaranteed Facility, payable semiannually inadvance of each Interest Period, with the first installment due on the earlier o f (x) the effective date of the IDA Guarantee and (y) sixty (60) days after signature of the IDA Guarantee Agreement; and 1.25% per annum on the aggregate scheduled disbursed and outstandingprincipal amount of the IDA Guaranteed Facility, payable: (a) semiannually inadvance of each Interest Period during any period when IDA is not makingpayments under the IDA Guarantee, and @) to be paid to GoL, with the first installmentdue on the earlier o f (x) the effective date of the IDA Guarantee and (y) sixty (60) days after signature of the IDA Guarantee Agreement; Standby Fee ("Standby Fee"). 0.25% per annum duringthe period when the IDA Guarantee is ineffect. This fee would be calculatedon the aggregate scheduled undisbursedprincipal amount of the IDA GuaranteedFacility and is payable semiannually inadvance of each Interest Period, with the first installment due on the earlier of: (i) the effective date of the IDA Guarantee, and (ii) sixty (60) days after signature of the IDA Guarantee Agreement; Initiation Fee ("InitiationFee"). US$ 100,000 payableby the Company following IDA'SBoard Approval, upon the Company's receipt of written demand from IDA; and ProcessingFee ("Processing Fee"). US$5.0Million payablein5 equal annual installments with the first payment due at FinancialClose and subsequent installments on their succeeding anniversary dates. A 211 Conditions Precedent: Usual and customary conditions precedent for a financingof this type, including butnot limited to the following: (a) Execution of allProject Documents and Finance Documents; (b) Delivery of all legalopinions; (c) Effectiveness of insurance required by the Finance Documents to be ineffect at FinancialClose and the naming of finance parties as co-insureds under those insurance policies and of IDAas namedinsuredunder third-party liability insurances; (d) Approval of the Executive Directors of IDA; (e) Execution, delivery and effectiveness of the Indemnity Agreement and the IDA Project Agreement(s); (f) Effectiveness of the IDA DevelopmentGrant Agreement with Lao PDR for the N a mTheun Social andEnvironmental Project (NTSEP); and (g) Payment of the Initiation Fee, the first installment of ProcessingFee, and the first installment of Standby Fee and the Guarantee Fee. Exclusions: The Guarantor (IDA) is not liable for the payment of any amount which is due to: (a) The Company' s failure to comply withany law, decree or regulation inforce inLao PDR as of the date of the Guarantee Agreement; (b) Anactionor omission(i) that was agreed to by the Beneficiary, any IDA Guaranteed Lender or the Company; or (ii) the preponderant cause of which isprescribed conduct of the Beneficiary, any IDA Guaranteed Lender or the Company, includingfailures to comply with the applicable laws or regulations of Lao PDR, breach of their material obligations set forth inthe Concession Agreement andrelated Project Documents, and failure to fulfill their other agreed obligations towards, or assurances given to, Lao PDR; or (c) Any act by the Beneficiary, any IDAGuaranteedLender or the Company that constitutes a Corrupt Practice, Fraudulent Practice, Harmful Child Labor or ForcedLabor (Prohibited Activities) Corrupt Practices: means: (a) the offering, promising, or givingof any undue pecuniary or other advantage, whether directly or through intermediaries to any official of the govemment, for that official or for a thirdparty to influence the official to act or refrain from acting inrelation to the performance of official duties, with the purpose of obtaining or retainingbusiness or anyother improper advantage; or (b) the acquisition, possession, use, conversion, transfer, or concealment of the true nature of property of any description, and legaldocuments or instrumentsevidencingtitle to, or interest in,such property, knowing that such property is an economic advantage inany way related to or arising from criminal offenses, for the purpose of (i) concealing or disguising the illicit origin of the property or (ii) assistingany personwho is involved in the commission of a criminal offense as a result of which such property is generated or sustained, to evade the legal consequences of such actions; A 212 Suspension of Additional I f any of the following events occur and is continuing, IDA may, by written Coverage: notice to the Beneficiary, deny guarantee coverage to subsequent draw downs, i f any: (a) Any materialdefaultbythe Company under any other Project Document, or Events of Default under the Common Terms Agreement; (b) Breachby the Company of any of its material obligations to IDA under the IDA ProjectAgreement@)whichbreach, inthe opinion of IDA, is continuing after the expiry of the relevant cure period (if any) specified therein; (c) An installment of the Guarantee Feeor Standby Feeisnot paid when due, after expiration of the relevant cure period; (d) Suspension of lendingby IDA or IBRD to Lao PDR; or (e) Suspension or lapse of Lao PDR from membership inIBRD, IDA or the InternationalMonetary Fund. Termination by IDA The IDA Guarantee Agreement may be terminated immediately i f (a) The Beneficiary intentionally makes an untrue statement in, or intentionally omits material informationor evidence from, a demand; (b) The Beneficiary, an IDA Guaranteed Lender, or the Company or any of its private shareholders or affiliates, engages in Prohibited Activities; (c) Any material change is madewithout IDA'Sconsent to those provisions of the Project or Financing Documents for which IDA s consent is required for changes; or (d) If IDA has not elected to suspend, an installment of the Guarantee Feei s not paid when due, after expiration of the relevant cure period. The IDA Guarantee Agreement will alsobe terminated: (e) UponIDA' s notice of termination if the Company is in material violation of the IBRD/IDA Environmental Guidelines and Safeguard Policies applicable to the Company; or (f) Effectiveas of the date the Beneficiary or any IDA Guaranteed Lender transfers, assigns or encumbers, without IDA' s prior consent, any rights under the IDA Guarantee Agreement, the IDAGuaranteedLoan, or an Award, provided that if Prohibited Activities are knownor attributable to an IDA Guaranteed Lender, or any IDA Guaranteed Lender transfers, assigns or encumbers, without IDA' s prior consent, any rights under the IDA Guarantee Agreement, the IDA GuaranteedLoan, or an Award (as contemplatedinparagraphs (b), (e) and (f) above), the IDA Guarantee Agreement willbe terminated only with respect to the IDA Guaranteed Lender (or Lenders) to which such Prohibited Activity, or such assignment or encumbrance, is attributable. Subrogation: I f and to the extent IDA makes payment under the IDA Guarantee and is not reimbursed by Lao PDR under its Indemnity Agreement within 60 days of notice from IDA, then IDA will be subrogated immediately to the IDA Guaranteed Lenders' rights under the IDA Guaranteed Facility. UntilIDA has fully paid out under the IDA Guarantee Agreement, IDA willnot exercise voting rights or realize on security under the IDA-Guaranteed Facility. A 213 Right to Offer to Purchase the If there is a call on the IDA Guarantee, IDAshallhave the right, at its sole IDA GuaranteedLoan: discretion, to limit its obligation to guarantee interestpayments by acquiring the IDA GuaranteedLoanfrom the IDA Guaranteed Lenders for an amount equal to the then unpaidprincipal and interest (not including default interest). Inthe event that IDA acquires the IDA Guaranteed Loan, IDA, at its discretion, will have the rightunder its IndemnityAgreement withLao PDR, to causeLaoPDR to make immediatepayment to IDAof the outstanding IDA Guaranteed Loanamount together with interest thereon. Claims Process: IDAwill paywithin sixty days after IDA' s receipt of a Demand Noticeor Demand for Provisional Payment. No Demandmay be filed after the third anniversary of the Final Maturity Date. Demandsmust be made not less than thirty days and not more than ninety days from the date on which an Award is rendered. Demands for ProvisionalPayments mustbe made no more thannine months after the due date of the scheduled payment that is indefault. Dispute Resolution: Disputes will be settled by arbitrationinaccordance with the UNCITRAL Arbitration Rules (or other internationalrules acceptable to IDA). Governing law: English Schedule 2. KEY TERMS AND CONDITIONS OF THE GoL-IDA INDEMNITY AGREEMENT Parties: IDA andLaoPDR. Indemnity: Lao PDR will reimburse and indemnify IDA, on demand or as IDA may otherwise direct, for all losses, damages, costs, expenses, etc. incurredby IDA relatingto or arising from paymentsunder the IDAGuarantee. Key Covenants Lao PDR will covenant, inter alia, that it: (a) will comply with all its obligations under the Transaction Documents, includingall its environmental and social obligations; (b) will obtainIDA' s consent prior to agreeing to any change to a Transaction Document which would materially affect the rights or obligations of IDA under the IDA Guarantee Agreement, the IDA Project Agreement(s) or the Transaction Documents; (c) will provide certain notices to IDA, including any proposed notice of termination of the Concession Agreement together withallunderlyingreasons therefor; (d) will take allactionnecessary on its part to enable the Company to obtain any required approval or environmental authorizationfor the Project and to perform all of the Company' s obligations under the IDA Project Agreement@) andthe TransactionDocuments; (e) willnot create or permit to exist or occur any circumstances or Change inLao PDR Law whichwould render obligations under the Concession Agreement (or related Project Documents including the GoL Undertaking with EGAT or the Direct Agreement with lenders) illegal, invalid, unenforceable, ineffective or void inwhole or part; and (f) will comply with all its obligations under the Development Grant Agreement for NTSEP. A 214 Remedies: I f Lao PDR fails to performunder its indemnityor any other obligation under this agreement, IDA may suspend or cancel, inwhole or inpart, Lao PDRs rights to makewithdrawals under any other loanwith the IBRD or developmental credit agreement with IDA or any IBRDloan/IDA credit to a thirdparty guaranteed by the Govemment. IDA may also declare the outstanding principaland interest of such loan/credit immediately due and payable inthe circumstances provided for inthe Indemnity Agreement. Choice of Law: The Indemnity Agreement will follow the usual legal regime and include dispute settlement provisions customary for agreements between member countries and IDA. Schedule 3. KEY TERMS AND CONDITIONS OF THE IDA NT2 PROJECT AGREEMENT Parties: IDA and the Company. Representations and The Company will represent, inter alia, that it is incompliance with Warranties: applicable World Bank Environmental Guidelines, SafeguardPolicies, and Fiduciary Policies. The Company will also represent that it has not been engaged inProhibited Activities.. Key Covenants: The Company will covenant, inter alia, that it: (a) willusethe proceeds of the IDA Guaranteed Loanonly for the agreed purposes; (b) willuse the portion of the GoL' s equity contribution funded by the Development Grant Agreement for NTSEP for the purposes agreed by IDA andGoL inthe Development Grant Agreement; (c) will comply with applicable World Bank Environmental Guidelines, SafeguardPolicies, and Fiduciary Policies (includingall of its environmental and social obligations included inthe Concession Agreement); (d) willenforce the headcontractor's obligations included inthe Head Construction Contract regarding environmental and social matters; (e) willnotengage inany Corrupt Practices or hire any individual or firm includedinthe World Bank group' s list of firms barred from World Bank-financed contracts; and (f) willprovide regular accounts andreportsto IDA. Governing law: English. A 215 Annex 17: Revenueand ExpenditureManagement LAO PEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 SocialandEnvironmentProject NAMTHEUN 2 REVENUEAND EXPENDITUREMANAGEMENT 1. Revenue and expenditure management i s central to the achievement of the NT2 project's development objective: "to generate revenues that will be used to finance spending on priority poverty reduction and environmental programs in Lao PDR through environmentally and socially sustainable exploitation of NT2's hydropower potential." This Annex provides an overview of the N T 2 revenue and expenditure management arrangements that seek to support the achievement of this project objective. 2. The approach adopted in the design of NT2 revenue and expenditure management arrangements focuses on strengthening of national public expenditure management systems. This serves a broader development purpose, since an effective, transparent expenditure management system i s essential ifLao PDR i s to use its limitedresources effectively in support of its poverty reduction and development objectives. Section A outlines the current status of the public expenditure management system, resource allocation issues and the potential impacts of NT2 revenues. Section B outlines the Government's proposed public expenditure management reforms and external partners' support to the reform and capacity building agenda. Section C outlines specific NT2 revenue and expenditure management arrangements which provide a framework for the application of NT2 revenues in line with the project's allocational and transparency objectives from the time of project commissioning. Details of the N T 2 revenue and expenditure management arrangements are laid out in the Technical Annex to the Government's Letter of Implementation Policy. Section D concludes with a review of the benefits and risks, risk mitigation and the alternative approaches to revenue and expenditure management considered. A. PublicExpenditureManagementContextandNT2Impacts 3. Status of public expenditure management systems.The 2002 PER and CFAA identified serious weaknesses in Lao PDR's systems for budget preparation, budget execution and control.' Some progress has been made in recent years. The Government has resumed publication of the state budget, together with budget execution data for the previous year, and has revised its chart of accounts for the FY2005 budget cycle. Work has started on the design of medium-term expenditure programs for the NGPES sectors. These will be integrated into the expenditure plan supporting the forthcoming Five Year Economic and Social Plan for 2006-10. The Ministry of Finance has approved a new procurement decree and internal regulations, standard bidding documents and a procurement manual are currently under review, providing a framework for a more transparent and efficient procurement system. Progress has also been made in computerization of payments processing and accounting for four central agencies. The ' Lao PDR Public Expenditure Review and Country Financial Accountability Assessment, Report24443-LA, Joint Report of World Bank, InternationalMonetaryFundand Asian DevelopmentBank, June 28 2002. A 216 computerized system i s now being rolled out across central and provincial government. Nevertheless, the expenditure management system still does not reach any of the H P C public expenditure management benchmarks. Despite recent revisions to the budget classifications and chart of accounts, it i s still difficult to link resources to specific functions and programs. These problems are compounded by the decentralization of responsibility for budget preparation, which allows for differing interpretations of policy priorities. As a result, there are significant per capita variations in resource allocations to priority sectors between provinces. Reporting by agencies and particularly provinces i s incomplete and difficult to reconcile. Effective treasury operations and cash management are hampered by multiple accounts, lack of systematic commitment controls and weak cash planning mechanisms. This has contributed to arrears to suppliers and delays in the payment of salaries. Revenue retention at provincial level exacerbates the central administration's cash constraints and results in delays in transfers to the poorest provinces. Although the budget books include budget execution data, the administration does not publish consolidated end-of-year financial statements or in-year budget execution reports. The recently created State Audit Organization (SAO) has limited resources in relation to its broad mandate. The SA0 undertakes limited compliance audits of a few line agencies. Audit reports are not published. 4. Resource Allocation. Since FY2001, following the successful conclusion of the fiscal stabilization program launched in late 1999, the Government has made some progress shifting resources in line with its development and poverty reduction objectives. The share of total spending (excluding debt service) allocated to the education and health sectors increased from 13 percent in FY2001 to 18 percent in the FY2004 budget. However, this was largely due to increases in the share of externally financed capital expenditures: allocations to education and health have remained at around 14 percent of domestically financed expenditures over this period. Furthermore, health and education expenditures in real per capita terms still fall short of the levels seen in the mid-1990's and are well below regional comparators at just 1 and 1.4 percent of GDP, respectively. Inthe economic sectors, allocations to agriculture fell sharply from FY2001 and FY2004 as the Government cut back on large irrigation schemes, while allocations of domestically financed expenditures to the roads sector have increased steadily. About one half of domestically financed expenditures are allocated to public administration (including security and the justice sector), with the share of these sectors rising slightly inrecent years, partly driven Table 1: Lao PDR Structure of Expenditure in Percent (Excluding Debt Service) TotalExpenditure ExcludingExtermalCapital Sector/Component Actual Actual Actual Budget Actual Actual Actual Budget 2000/01 2001/02 2002103 2003104 2000/01 2001/02 2002/03 2003/04 PublicAdministration 32 40 34 29 47 47 49 54 EconomicSectors, of which 50 35 41 38 34 31 31 25 Agriculture 19 13 13 9 23 15 14 6 TransportandCommunications 26 19 25 26 8 12 13 16 Social Sectors, of which 18 25 24 24 18 22 17 19 Education 9 13 11 12 10 12 10 11 Health 4 6 6 6 4 4 3 3 Other/ Reserve 0 0 1 9 0 0 2 2 Capital 68 63 64 69 47 47 42 34 Recurrent 32 37 36 31 53 53 58 66 Source: Ministry of Finance, Budget Books A 217 by increases in personnel costs. Across all sectors, there has been a marked shift in domestically financed expenditures from capital to recurrent spending, with recurrent spending increasing from just 53 percent of domestically financed expenditures in FY2001 to 65 percent in the FY2004 budget. Nevertheless, operating and maintenance expenditures are still under-funded across all sectors. Civil service pay fell in real terms in the late 1990's and has yet to recover. In the absence of reductions in staffing, Government-wide pay reform i s likely to result in a further shift in resources towards public administration. Ultimately, the pace at which the Government can increase spending on NGPES 140 - I I I C I sectors, recurrent expenditures and 120 pay reform will be determined by improvements in revenue 100 performance. In this context, NT2 80 plays an important role as one of a number of policy and administrative 60 measures intended to mobilize the 40 domestic resources needed to 20 finance Lao PDR's poverty reduction and development strategy. 0 1 5. Revenue impact. Revenues from the NT2 project are expected 10Water Resource UserCharge Taxes 0 GOL Contribution & NTPCDividendsI 1 to be available to Government from FY2010, including: GOL Figure 2: Total and Net NT2 Revenue Stream contributions under Article 19.1 of 160 , (NominalUS$ Mn) the Concession Agreement, water I I - 1 resource user charges, NTPC dividends and taxes. Estimated NT2 revenues to GOL rise gradually in the early years, averaging about US$30 million (nominal) per year during the first ten years while commercial debt service i s paid, then rising sharply thereafter to an average of approximately U S $ l10 million (nominal) from 2020 to 2034 (see Figures 1 and 2).2On the basis of economic and revenue growth projections used for the Net NT2 Revenues -Total NT2 Revenues I recent debt sustainability analysis, Estimates of nominal NT2 revenues are based on the lenders' financial model dated February 2005, adjusted to coincide with Lao PDR financial years. NT2 revenues available for allocation through NT2 revenue and expenditure management arrangements will be slightly lower, owing to the deduction of EIB and ADB debt service related to acquisition of equity in NTPC and the project related costs of LHSE, the Government's equity holder. A 218 r NT2 revenues will account for between Figure 3: ComparisonofNT2 Revenues with - 3 to 5 percent of total revenues in the FY2003Revenues andExpenditure period to FY20203. While NT2's 35.0 Components (US$ mn) contribution to total revenues i s likely to be fairly modest, the project's 30.0 revenue impact i s significant when 25.0 compared with other revenue sources. NT2 revenues in 2011, adjusted to 20.0 FY2003 prices, are equivalent to around 50 percent of turnover tax collections 15.0 and 80 percent of profit tax collections 10.0 inFY2003. 6. 5.0 Expenditure impact. Similarly, N T 2 revenues can have a significant 0.0 impact on expenditures if well targeted NT2 2011 Turnover Profit Tax Education Education (see Figure 3). Projected N T 2 revenues Revenues Tax FY2003 FY2003 Domestic External (FY03 Actual Actual FY2003 FY2003 in 2011, adjusted to FY2003 prices, are prices) Actual Actual equivalent to about 60 percent of domestically financed expenditures on education and health in FY2003. If the NT2 revenues were allocated to the wider range of priority sectors identified in the NGPES, they would still have an appreciable impact: estimated NT2 revenues in 2011, at FY2003 prices, would be equivalent to about 19 percent of domestically financed expenditures on health, education, agriculture and transport and communications. The impact of NT2 revenues in terms of increments of expenditure for narrowly targeted programs would be significantly higher than the broad sector comparators suggest. B. Strengthening National Systems 7. The NGPES recognizes that "sound, accountable and transparent financial management i s an integral part of the Government efforts to increase efficiency of public management and resource allocation". Development of these systems requires interventions at various levels: in the Ministry of Finance, oversight bodies, notably the State Audit Organization, the sector ministries and the provinces. This section outlines the various reform programs underway and the external support to these reforms. 8. Public Expenditure Management Strengthening Program. The Government's public expenditure management reform strategy to end FY2009 i s laid out in its Public Expenditure Management Strengthening Program (PEMSP), approved b y the Minister of Finance. The program builds on an extensive body of analytical work, including ajoint IMF,ADB and World Bank Public Expenditure Review of 20024. The PEMSP also draws on the Government's IMF, Lao People's Democratic Republic: Selected Issues and Statistical Appendix, Country Report 05/09, January 2005. Lao PDR Public Expenditure Review and Country Financial Accountability Assessment, Joint Report of InternationalMonetaryFund, Asian DevelopmentBank andWorld Bank, ReportNo. 24443-LA,June 28,2002. A 219 governance strategy5 and the expenditure management reform strategy laid out in the NGPES.6 The program lays out the broad objectives for reforms, identifies the intended outcomes and indicators to monitor improvements in system performance, and lays out an implementation schedule. The program covers the key expenditure management functions: fiscal planning and budget preparation, treasury, accounting and reporting, the development of information systems and the legislative framework for public expenditure management. Capacity building figures prominently in the program, with particular emphasis on training to support program implementation and the introduction of accredited courses to develop the core skills of financial management personnel at all levels of the administration. The program will also focus on the development o f capacity at the provincial level, through development of appropriate systems and training. Implementation of the program as currently scheduled would allow the Government to make significant progress towards meeting international benchmarks for public expenditure management by FY2009, the year in which NT2 i s scheduled to be commissioned (see Table 2).' The approvedprogram overview and implementation schedule are attached. Table2: ProgressagaimtHPCPublicExpenditweManagementIndicatorsunderPEMSP Budgetreportingfollows GFSdefinitionof consolidatedgeneralgovernmat. A B G o v m n t activities notfundedthroughextrabudgetarysources. A B Budgetoutturndata(levels, functional allwation) closeto that of theoriginalbudget B C Budget includescapitalandcurrentexpenditurefinancedbydonors. A B CLASSIFICATION Budget classifiedonanadninistmtive,economic,functional basis. B C Poverty-relatedexpenditureclearlyidentifiedinthe budget. A C PROJECTION Multi-yearexpenditure projectionsinkgatedintothebudgetcycle . A B "ALCONTROL Stockofexpenditure arrears;little accumulationofnewarrearsover pastyear. A C Internalaudit is active. A B Trackingsurveys supplemnt internalcontrol. B C RECONCILIATION Fiscalandbankingreconciliationundertakeninaroutinely. A B " G Internalbudgetreports fromlineministri"sury receivedUithinfour weeks. B C Functionalclassificationisreflectedinthe in-year budgetreports. A C FINALAUDI'IEDACCOUNTS Closure of the accountsoccurs withintu0 m n hafter the endof the fiscal vear. A B B B Aud~tedaccount presentedtothe 1e)zlslaturewihn 12 m n h --- C C B Source WorldBank mwssnletuuing MPC PEM ittdrcarorscud benclumrk\ B "Priority Areas for Governance Reform: A Policy Paper of the Government of Lao PDR on Governance Issues" A Policy Paper of the Government of Lao PDR on Governance Issues, Roundtable Process, Vientiane, March 2003. See pages 50 - 64. "National Growth and Poverty Eradication Strategy", Vientiane, June 2004, page 6 and 7, see Annex 2.4 for the "Action Planfor Improving Public Expenditure Management". See also, Lao PDR, National Round Table Process Steering Committee, "Note on Progress towards Implementation of the NGPES", October 2004. InTable 2, Lao PDR's public expenditure management system and the impact of PEMSP implementation have been mapped against the HIPC public expenditure management performance indicators and the corresponding A 220 9. PEMSP Implementation Arrangements, The Ministry of Finance has established an internal "Program Steering Committee", chaired by the Vice-Minister, to approve and monitor department's annual work plans. A "Program Coordination Committee", chaired by the Ministry of Finance with participation of contributing partners will meet twice-yearly to: review and update the program in line with progress in program implementation and the Government's policy directives; and program external support, including training and technical assistance inputs, required for program implementation. The Ministry of Finance will prepare biannual progress reports on program implementation. 10. External support to PEMSP. PEMSP will provide a framework for mobilizing and coordinating external assistance in support of the Government's public expenditure management reforms, The World Bank will support program implementation through a sequence of PRSCs, from 2005 through 2007, with PRSC prior actions linked to implementation of key reforms scheduled under the PEMSP. Initially, core financing for technical assistance and the capacity building activities foreseen under the program will be provided through the World Bank's on- going Financial Management Capacity Building Credit (FMCBC). The Government has approved the recruitment of two long-term advisors to assist the Ministry coordinate PEMSP implementation: one advisor covering technical aspects of the program, the other supporting capacity building activities. These advisors will assist the Ministry implement, coordinate and oversee short-term consultancies under the program. Following a programmatic approach, the PEMSP will integrate assistance provided by on-going and programmed assistance including World Bank Institutional Development Fund small-grants (supporting procurement reform), ADB technical assistance grants (accounting regulations and computerization in agencies and provinces) and pipeline projects financed by AFD (vocational training in accounting), UNDP (fiscal decentralization policy) and JICA (fiscal planning). The World Bank and ADB will assist the Ministry o f Finance mobilize grants from bilateral partners to cover core program financing requirements. 11. Next steps in PEMSP implementation. The Ministry of Finance intends to integrate PEMSP activities for FY2005 into departmental work plans during the mid-year revision. In the meantime, a number of PEMSP activities are already underway. The Ministry of Finance i s currently undertaking a review of Treasury functions with the assistance of a Treasury Advisor financed under the FMCBC. Work on updating the medium-term expenditure framework i s underway, starting with expenditure programs for the key NGPES sectors. The Ministry i s also undertaking a training needs assessment andpreparing capacity buildingplan to support PEMSP implementation, with the assistance of the European Union. On the basis of this capacity buildingplan, the Ministry intends to finalize detailed schedule of training activities and short- term technical assistance inputs, together with PEMSP financing requirements for the period to FY2009, b y end of September 2005. 12. State Audit Organization. In parallel with the PEMSP, the State Audit Organization (SAO) has recently approved a strategic plan for FY2005 to FY2009. The strategic plan anticipates: preparation of draft audit legislation in 2005, providing for institutional independence and clarification of the institution's authority and reporting requirements; financial benchmarks, as explained in: IMFand World Bank, Public Expenditure Management Country Assessment and Action Planfor HIPCs, October 2003. http://wwwl.worldbank.org/publicsector/pe/FinalHIPCAAPGuidance2003-O4.pdf A 221 audits of State Owned Enterprises including banks and of loan projects in accordance with international standards b y 2006; and audits of the consolidated financial statements of government by 2009. The strategic plan includes a five year audit plan and a human resource development plan, which calls for extensive training of State Audit Organization staff and modest increases in staffing levels. ADB assistance to the SAO, which supported preparation of the strategic plan and audit manuals, i s scheduled to terminate in late 2005. Further assistance will be needed to support implementation of the SAO's strategic plan. This assistance will be provided, in part, through an audit peer review by an INTOSAI partner institution which will provide guidance on progress towards international standards. Peer reviews are scheduled for FY2006 and FY2009 and fundedunder NT2 monitoring arrangements. 13. Sector interventions. Alongside support to core institutions (the Ministry of Finance and State Audit Organization), the World Bank supports the development of financial management systems and capacity building through its portfolio of sector projects. Recently approved and pipeline projects in the education, health and roads sectors together with the Poverty Reduction Fund, include components geared to the development of agency financial management systems, particularly systems designed to channel resources close to the field level, as well as the formulation of sector level expenditure policies*. These projects are designed to meet the expenditure management needs at sector level. The challenge in coming years will be to coordinate the various initiatives across government, so that the core systems reforms, under PEMSP, support the initiatives taken by line agencies. At the same time, it will be important to ensure consistency in approach, particularly as regards reporting and accounting standards and compatibility of information systems. The recent establishment of sector working groups provides a framework for development of a consistent approach among development partners in the diverse NGPES sectors. Within Government, the Ministry of Finance i s expected to assume a stronger role inguiding and supporting financial management reforms at sector level. C. SpecificArrangements for ManagingNT2Revenuesand Expenditures 14. Objective. The N T 2 revenue and expenditure management arrangements seek to ensure that NT2 revenues are applied transparently and efficiently infinancing of poverty reduction and environmental conservation programs reflecting the Government o f Lao PDR's policy priorities as laid out in the National Growth and Poverty Reduction Strategy and its successors. These arrangements have been designed within the framework of the Budget Law, which requires a unitary and unified state budget, and guided by the principles o f sound public expenditure management. They have also taken into account the need for allocational flexibility, given that development policies and needs are likely to change before and after N T 2 commissioning, in FY2010, when revenues first come on stream. The arrangements buildon and accelerate system- wide reforms under the PEMSP by focusing attention on a few highpriority programs benefiting from NT2 revenues. These programs will be required to meet financial management and reporting standards and put in place adequate monitoring systems, including mechanisms for performance evaluation in consultation with stakeholders close to the field level. Inthis way, the implementation of NT2 revenue and expenditure management arrangements i s expected to have * Second Education Development Project, Approved 2004, PO78113; Second Road Maintenance Project, Approved 2004, P083543; Poverty Reduction Fund, Approved 2002, P077326; and Health Services Improvement Project, inpreparation. A 222 a direct impact on the core systems used to manage all public resources, leading to improvements in transparency and the policy alignment of spending. The continuing need for specific NT2 revenue and expenditure management arrangements will be reviewed before project commissioning and periodically thereafter, taking into account progress in strengthening of the Government's public expenditure management systems. 15. Capture of NT2 revenues. There are two sources of NT2 revenues. The first source of NT2 revenues are revenues paid by NTPC, as provided for under the Concession Agreement, including water resource usage charges and taxes. Until commercial debt is fully repaid, these revenues will be paid from a project escrow account to the Ministry of Finance's "NT2 Revenue Account": thereafter, these revenues will be paid to the "NT2 Revenue Account'' by NTPC (see Figure 4 below). The second source of NT2 revenues are revenues paid by the Lao Holding State Enterprise (LHSE) related to its equity holding in NTPC. Dividends from NTPC payable to LHSE will be channeled through an escrow account. Part o f the funds transferred to the LHSE will cover operating expenses, on the basis of a budget approved annually by the Ministry of Finance as shareholder, and the company's cumulative fund required by law. The remainder of the funds derived from NTPC dividends will be transferred to the "NT2 Revenue Account", comprising the repayment and service of funds on-lent by the Government of Lao PDR for the purchase o f equity in NTPC, taxes and dividends, and any payments under Article 19.1 o f the Concession Agreement. Both NTPC and LHSE are required to prepare annual financial statements clearly indicating all payments of NT2 revenues. These financial statements will be subject to independent audits. In this way, it will be possible to verify that all the NT2 revenues have been transferred to the NT2 revenue account. A 223 16. Allocation of NT2 revenues. NT2revenues will be allocated to priority poverty reduction and environment programs identified in the NGPES and its successors. The Ministry of Finance will be responsible for verifying that the programs to benefit from NT2 revenues meet eligibility criteria (see Box 1). These criteria are intended to ensure that programs have a clear poverty reduction or environmental orientation, a track record o f financial reporting and adequate monitoring systems, including mechanisms for consultation with key stakeholders. Programs will be budget entities, defined at the sub-sector level. Further refinement of program definitions may include geographical targeting of NT2 financed expenditures. The Government has identified five indicative eligible programs on the basis of NGPES priorities: basic education; basic health care; rural roads; local development initiatives identified through a participatory planning process; and environmental protection initiatives. These programs are implemented, in part, through statutory funds - the Road Maintenance Fund, the Poverty Reduction FundPoverty and the forthcoming Lao Environment and Conservation Fund - which have specific oversight and governance arrangements. The selection of eligible programs will have to be adjusted periodically to take account of changing development objectives, as the Government prepares successors to the NGPES. Indicative allocations to the eligible programs will be included in the Government's medium-term expenditure plans. Funds will be allocated to eligible programs as part of a comprehensive State budget. For budget administration purposes NT2 revenues and NT2 revenue financed expenditures will constitute a "virtual fund": budget documents will clearly indicate the proposed allocations of NT2 revenues between priority programs for information purposes, but NT2 revenues would be subsumed within appropriations. Since NT2 revenues will be co-mingled with other Government funds, it will not be possible to identify individual transactions financed by NT2 revenues. Instead, additionality o f NT2 revenues will be Box 1:NT2Eligible ProgramSelection Criteria 0 Programs are identified as priorities in the Government's National Growth and Poverty Eradication Strategy, and its successors; with 0 A significant and verifiable poverty reduction impact, providing public goods, services and infrastructure used by the poor in rural areas, including public services which aim to promote economic growth by increasing productivity and incomes of the poor; and / or 0 A significant and verifiable conservation or environmental impact; and 0 Clearly defined objectives, performance indicators and systems in place for monitoring performance in terms of the volume and quality of services provided; 0 Established mechanisms for program performance evaluation, involving key stakeholders at or close to the field level; 0 Programs are clearly distinguished in the Government's budget and chart of accounts (through a detailed administrative / organizational or program classification) at all levels of administration, with institutional responsibility for programmanagement clearly assigned; 0 Programs have administrative and financial management arrangements in place allow them to meet financial reporting requirements, and have demonstrated compliance with these financial reportingrequirements; 0 Programs have benefited from budgeted expenditures prior to selection and have a continuing recurrent financing requirement over the mediumto long-term, and with a medium-term financing plan. In some cases, the Government may introduce new medium to long-term programs, reflecting policy initiatives launched under NGPES successors. A 224 assessed against the base expenditures of eligible programs funded from general revenues. This will reduce the risk of NT2 revenues substituting for funding from other sources. The method for determining the additionality of NT2 revenues - and the need for continued monitoring of additionality - will be reviewed and agreed with the NT2 financing partners three years after project commissioning and thereafter as deemed necessary. The purpose of this review will be to ensure policy consistency and efficiency in the application of NT2 revenues, taking into account the structure of expenditure across the budget and absorptive capacity of eligible programs. 17. Flow of Funds. All NT2 revenues will be channeled through a segregated Treasury account held at the Bank of Lao PDR, the "NT2 Revenue Account" (see Figure 4). Funds will be released from this account to the Central Treasury Account for the purposes of budget execution on the basis of the approved Figure 4: FLOW FUNDS OF apportionments (funds release authorizations) for the eligible programs. NT2 revenues will be co-mingled with other public resources and managed following standard budget execution procedures. However, the Minister of Finance may withhold the release of part of the funds held in the "NT2 Revenue I Taxes &Water Account" where: the application of funds Usage Charges i s no longer justified or appropriate, for example where alternative sources for funding are made available; the agency responsible for the program has not complied with reporting requirements; there has been a serious control failure; funds have not been used for the purposes intended; or where budget execution has slowed significantly. This allows the Ministry o f Finance to restrict the flow of funds to programs that persistently fail to meet adequate financial management standards. In order to ensure efficiency in the allocation o f N T 2 revenues, the / 1 I Project Ministry of Finance will adjust allocations Other Programs Eligible Programs Costs of N T 2 revenues between eligible programs in-year following normal budgetary procedures. Funds retained in the account at the end of the year will be U applied in financing eligible programs in the following fiscal year. The Ministry of a H3 Finance will prepare an annual statement for the "NT2 Revenue Account". - 18. Reporting and oversight. The reporting and oversight requirements for ,,,111444114 NT2revenues Fg4$ NT2and general revenues ,:/,a5 A 225 NT2 revenues are intended to promote transparency in public expenditure management. The Ministry of Finance will prepare and publish quarterly budget execution reports and annual financial statements for the eligible programs. If these reports are prepared for the state budget as a whole, clearly identifying the application of NT2 revenues, as currently scheduled under the PEMSP, specific reports on the NT2 programs would not be necessary. The control environment of eligible programs will be assessedthrough regular internal audits, undertaken by the Ministry of Finance. A summary report on internal audit findings will be published.The "NT2 Revenue Account" and eligible programs will also be subject to annual audit, carried out by the State Audit Organization, following INTOSAI standards. The State Audit Organization will be peer- reviewed by an INTOSAI member acceptable to the Government and NT2 financing partners to verify that standards are being applied and recommend corrective action where they are not. The peer review process will be funded by NT2 financing partners. Audit reports and a summary of peer review findings will be published. Table 3: Monitoring Framework for NT2Revenue and ExpenditureManagement MonitoringInstrument Before NT2 After NT2 PEMSPProgressReports RevenueManagementReport NT2 Consultation PublicExpenditureTracking Surveys 2005,2007 Every 2 yrs PublicExpenditureReviews Audit PeerReview 19. Monitoring. Monitoring of NT2 revenue andexpenditure management arrangements will assess progress implementation of public expenditure management reforms, compliance with arrangements after project commissioning and the impact of NT2 financed eligible program expenditures (see Table 3 below). The key monitoring instruments are Public Expenditure Reviews and Public Expenditure Tracking Surveys to be carried out every two years. The first Expenditure Tracking Survey focuses on the health and education sectors. Field testing i s expected to take place in April 2005 and the main survey in October 2005. The results of this survey will feed into a Public Expenditure Review covering all NGPES sectors scheduled for the second half FY2006. The intention i s to develop action plans for strengthening expenditure management and improving the impact of public spending in the indicative eligible programs. Impact will be assessed in terms of the pro-poor orientation of spending and progress against program performance indicators. Follow-up PERs and PETSwill take place every two years, funded by the NT2 financing partners and other development partners. Analytical work will provide recommendations for strengthening of expenditure management arrangements. 20. Consultations. Prior to project commissioning, the Bank, together with other financing partners, will assess progress in implementation of public expenditure management reforms and the implementation NT2 revenue and expenditure management arrangements. The review will include a technical assessment as to whether the measures taken by Government are sufficient to meet agreed allocational and transparency requirements. If little progress has been made, and A 226 arrangements are not sufficiently robust, the review may recommend that part or all of NT2 revenues should be withheld in the "NT2 Revenue Account" until the necessary fiduciary safeguards are in place. Following commissioning, the Ministry of Finance will publish a summary report each year on the application of NT2 revenues, compliance with the financial management requirements and the measures taken to ensure that eligible programs meet allocational requirements and transparency standards. This report, together with the results of periodic PERs, PETSand audit peer reviews, will serve as the basis for annual consultations with NT2 financing partners. These annual consultations will provide an opportunity for the Government and NT2 financing partners to assess compliance with agreed revenue and expenditure management arrangements and recommend adjustments in line with progress in public expenditure management reforms. Benefits, Risksand Alternatives 21. Benefits. The principal benefit arising from the NT2 revenue and expenditure management arrangements will be an increase in the level of spending on priority poverty reduction and environmental programs. As a secondary benefit, N T 2 revenue management arrangements will improve transparency by requiring publication of budget allocations, quarterly budget execution reports, financial statements and audit reports, as well as requiring the involvement of key stakeholders at or close to the field level in program evaluation. This represents a significant step forward in the Lao PDR context. However, the ultimate test of the N T 2 revenue and expenditure management arrangements i s that the additional expenditures contribute to improvements inpublic service performance, and thereby on poverty reduction and conservation outcomes - even if the achievement of these outcomes is influenced b y a range of governance, policy and management arrangements that go far beyond the scope of the project. Regular public expenditure reviews and expenditure tracking surveys will provide a means of assessing these impacts and provide feedback that will help improve the development impact of NT2financed expenditures. 22. Risks and risk mitigation. While the NT2 revenue and expenditure management arrangements should ensure that NT2 revenues will be applied transparently and accountably in financing poverty reduction and environmental programs, there are risks associated with using the Government's expenditure management system. Delays in the implementation o f the Public Expenditure Management Strengthening Program could mean that the key elements of revenue and expenditure management arrangements (the revised chart of accounts, program level financial reporting and monitoring mechanisms) are not in place by the time NT2 i s commissioned. Implementation of PEMSP will benefit from support from the Bank and other development partners, with a considerable emphasis placed on capacity building at all levels. Support to PEMSP capacity buildinginitiatives, close monitoring of PEMSP implementation and the linking of PEMSP milestones to PRSC prior actions should mitigate the risk o f delay, b y focusing attention on implementation of the reform program in the period before NT2 commissioning. Key elements of the revenue management arrangements are reflected in project agreements. Six months before COD, the status o f NT2 revenue management arrangements will be assessed as part of the comprehensive project review. If little progress has been made, NT2 revenues will only be applied in financing those programs that meet the eligibility requirements, as stipulated in the project agreements. The Ministry of Finance can withhold program allocations in the "NT2 Revenue Account" until the eligibility criteria have been fulfilled or reallocate these resources to other eligible programs. A 227 23. Alternatives.Design of the NT2 revenue and expenditure management arrangements has drawn on the World Bank's experience in a variety of contexts: dams, oil and gas projects, and budget support operations. Key considerations in assessing the suitability of this experience in the Lao PDR context include the structure and volume of resource flows relative to total revenues, the prevailing governance arrangements and the legislative framework for public expenditure management. The alternatives considered are reviewed below: (i) Channeling of NT2 Revenues directly through the Poverty Reduction Fund and the forthcoming Lao Environment Fund, This would target NT2 revenues to small-scale, community identified projects and environmental initiatives, and may reduce fiduciary risks, by segregating funds and providing for additional external oversight arrangements. Two concerns arise. First, N T 2 funds are public funds and management of these funds should follow the procedures laid out in relevant legislation: NT2 revenues should be channeled through Treasury and allocated through the budget process. NT2 revenues may be allocated to statutory funds through these mechanisms but cannot be earmarkedto the Funds directly. Second, the activities supported by these funds may not represent the most effective application of all NT2 revenues, particularly since these Funds would not be able to finance the recurrent costs of service delivery. Reflecting these concerns, NT2 revenues will be channeled through Treasury and allocated through the budget process. The indicative eligible programs identified include, but are not restricted to, the Poverty Reduction Fund,the Lao Environment Fundandthe RoadMaintenance Fund. (ii) Establishment of an independent oversight body for NT2 revenue and expenditure management arrangements. Independent oversight bodies can play a role in verifying regulatory compliance, improving transparency in decision-making and, in some cases, providing policy guidance. NT2 revenues and expenditures on eligible programs are subject to oversight by the National Assembly through the budget process and financial reporting process. While it may be appropriate for the National Assembly to delegate its oversight responsibilities in the case of single purpose funds, delegation to another body would be inappropriate where funds are applied across a range of sectors and institutions. The publication of key financial reports should ensure that adequate standards of transparency are maintained. Furthermore, preparation of the NGPES and the successors provides an opportunity for consultation with key stakeholders on expenditure priorities. Implementation of regular public expenditure reviews and public expenditure tracking surveys, together with the annual report on NT2 revenue management arrangements, should provide ample opportunity for consultation and oversight regarding expenditure priorities and performance. (iii) Audit of NT2 Revenue Account and eligible programs by or in conjunction with a Contracted independent auditor. Given the limited capacity of the recently created State Audit Organization, involvement of an experienced auditor might lead to greater rigor in the audit process. Participation of a contracted auditor inthe audit of the N T 2 Revenue Account would be relatively straightforward but not particularly informative, since this i s effectively a transit account and the Government's receipt o f NT2 revenues can be independently verified from audits of the source of funds (NTPC and LHSE). Participation of a contracted auditor in the audit of eligible A 228 programs would be impractical: since NT2 revenues are co-mingled with general revenues in the Treasury account and disbursed through a large number of institutions at central, provincial and district levels, any contracted auditor would require significant scope limitations. In this context, the INTOSAI peer review process i s considered the most appropriate means of helping the State Audit Organization gradually move towards internationallstandards. Regular public expenditure reviews and public expenditure tracking surveys will also assess the adequacy of the control environment, identify fiduciary risks and provide a framework for consultation on the measures neededto improve financial management systems. A 229 Annex 18: PartnershipPrinciples LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 SocialandEnvironmentProject Implementationof LaoPDRNamTheun2 Project:MultilateralandBilateralPartnership The purpose of the partnership i s to improve the quality of donor support for the implementation o f Nam Theun 2 project (NT2) and thereby enhance its contribution to Lao PDR's Growth and Poverty Reduction Strategy (NGPES). The aimof the partnershipis to: 0 support the government's implementation framework for the N T 2 project by strengthening and harmonizing donor support; 0 promote trust and transparency between government, the stakeholders, donors' involved inthe project; andthe international community; 0 focus on government and developer implementation performance on the project, particularly on managing project risks; 0 strengthen donor dialogue with government and other stakeholders by coordinating supervision missions, systematically consulting civil society and project affected person, organizing periodic donor meetings, and reporting progress to the Roundtable mechanism ledby the Government and supportedby UNDP. The Partnershipwill bedrivenby the followingprinciples: 0 Promoting Donor Synergy: exploit relative institutional strengths; work together through dialogue and analytical activities to understand the evolving project context in all its dimensions (e.g.: technical, financial, economic, environmental, social, revenue management); share assessments; adopt common project monitoring and evaluation arrangements; and avoid duplication in supervision effort; seek complementarity in financing of future initiatives that expand the development impact o f the NT2 project in areas such as energy/hydropower development, river basin management, strengthening of environmental and social safeguards, improving rural livelihoods. Zmproving Communication with stakeholders: build open relationships with the wide range of project stakeholders; show willingness to share appropriate project information with government, other donors, civil society and project affected persons; reinforce government initiatives to listen to the voices of the poor particularly bearing in mind language barriers; andprovide feedback to communities after consultations. 0 Strengthening assessments of project performance: establish common standards and understanding on assessment of government and other stakeholder performance on the project through effective M&E arrangements; share information with government and among the stakeholders, including project affected persons, concerning project risks as they are handled or emerge, including those caused by deviations from project legal and other arrangements; work towards a common approach for resolution of the issues. A 230 0Highlighting the NT2-NGPES nexus: monitor closely the impact of NT2 on achieving government's NGPES objectives; hold periodic donor meetings; keep the broader donor community and civil society informed on progress inter alia through the Roundtable mechanism led by the government and supported by UNDP; contribute to a shared view among donors on future dimensions of assistance in support of NGPES. A 231 Annex 19: Documentsinthe ProjectFile LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 Social andEnvironmentProject Environmental and Social 1. Environmental Assessment and Management Plan (EAMP),NTPC, Final Report, 2004 2. Social Development Plan (consisting of the Resettlement Action Plan, RAP, and Ethnic Minorities Development Plan, EMDP) (SDP), NTPC, Final Report, 2004 3. Social and Environment Management Framework and First Operational Plan (SEMFOP), GOL-WMPA, Final Report, 2004 4. Summary Environmental and Social Impact Assessment (SESIA), GOL-MIH / NTPC, 2004 5. Cumulative Impact Assessment (CIA), Eco Lao / Norplan, 2004 6. Strategic Impact Assessment (SIA), Norplan, 2004 7. Reports of the Environmental and Social Panel of Experts (POE), various dates EconomidFinancial 8. Supporting Information (Appendices) for the Economic Analysis included in the NT2 PAD 9. NT2 Project Economics: InterimSummary Report (Segal, August 2004) and Project Economic Analysis (Segal, March 2005) 10. Power SystemDevelopment Planfor Lao PDR (PSDP)by MaunsellLahmeyer International, Final Report, August 2004) 11. RegionalEconomic Least-Cost Analysis (Vernstrom, June 2004 andMarch 2005 12. Impact o f Energy Conservation, D S M and Renewable Energy Generation on EGAT's Power Development Plan (duPont, FinalReport, March 2005) 13. Country Economic Memorandum (Report 30188-LA, December 2004) 14. Economic Analysis of the Environmental and Social Impacts of the Nam Theun 2 Hydroelectricity Power Project (Laplante, February 2005) 15. Lao PDR: The Proposed NamTheun 2 Hydropower Project: Understanding the Macroeconomic Effects (Peter Warr, December 2004) 16. Review of Procurement Process & Outcomes-Executive Summary (Colenco, April 2004) 17. Thailand Power Scenario Study (Vernstrom, February 2003) 18. Study of Alternatives, Lahmeyer Int'l/ Worley Int'l (1998)" 19. Economic Impact Study, Louis Berger (1997)" 20. World Bank Financial Analysis -Financial Models *Note: These studies were the result of early project due diligence: however, they have been superseded by newer studies undertaken since 2001, when the project regained momentumfollowing the signing of the (amended)MOU and agreement on the Bank's "Decision Framework" for processing the proposed NT2 project. Technical 21. Reports of the DamSafety Review Panel 22. Nam Theun 2 Hydroelectric Project Feasibility Study b y Snowy Mountains Engineering Corporation, Ltd. (September 1991) A 232 Project Sponsor Documentation 23. Sponsors' Financial Models (1996-2004) 24. Project Information Memorandum (NTPC, November 2003) Contractual Documents and related analyses 25. Tariff Memorandum of Understanding(August 2000) 26. Shareholders Agreement between EDL, EDF,EGCO and ITD (executed September 2001) 27. Concession Agreement (executed October, 2002) 28. Power Purchase Agreement (executed November 8,2003) 29. NamTheun 2 Power Purchase Agreement: Commercial andTechnical Review-A Final Report (Frontier Economics Limited, May 2003) 30. NamTheun 2 Hydroelectric Power Project: Preliminary Review of Basic Contractual Documents (Linklaters and Mekong Law Group, May 2004) 31. NT2: IDA Guarantee Agreement (between IDA and Agent for the Lenders) 32. NT2: Indemnity Agreement (between Lao PDR and IDA) 33. NTSEP: Development Grant Agreement (between Lao PDR and IDA) 34. NTSEP: Project Agreement (between IDA and NTPC) Other 35. Bank's Decision Framework for Processing the NT2Project, June 2002 36. Reports of the InternationalAdvisory Group (IAG) for NT2, various dates 37. Lenders' due diligence (2004 - Financial Close) 38. Lenders' Financial Models (2004-2005) A 233 Annex 20: Statementof Loansand Credits LAOPEOPLE'SDEMOCRATIC REPUBLIC NamTheun 2 HydroelectricProjectandNamTheun2 SocialandEnvironmentProject Difference between expectedand actual Original Amount inUS$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Fm. Rev'd PO83543 2004 LA-APL2 RoadMaintenanceProgram 0.00 22.65 0.00 0.00 0.00 23.87 0.00 0.00 PO78113 2004 LA-Second EducationDevelopment 0.00 13.00 0.00 0.00 0.00 14.50 0.56 0.00 PO75006 2003 LA - SecondLandTitling Project 0.00 14.82 0.00 0.00 0.00 14.49 4.54 0.00 PO64886 2003 LA-SustainableForestry for RuralDev. 0.00 9.90 0.00 0.00 0.00 10.24 4.09 0.00 PO77620 2002 LA-Fin. ManagementCapacity Building 0.00 8.50 0.00 0.00 0.00 8.99 2.98 0.00 Cr. PO77326 2002 LA-Poverty ReductionFundProject 0.00 19.34 0.00 0.00 0.00 19.68 2.98 0.00 PO65973 2001 LA-Agricultural DevelopmentProject 0.00 16.69 0.00 0.00 0.00 15.88 4.52 0.00 PO42237 1999 LA-Provin. Infrast. 0.00 27.80 0.00 0.00 0.00 6.46 4.01 0.00 PO04208 1996 LA-LandTitling 0.00 20.70 0.00 0.00 0.00 6.25 7.18 7.25 Total: 0.00 153.40 0.00 0.00 0.00 120.36 30.86 7.25 LAOPEOPLE'SDEMOCRATICREPUBLIC STATEMENT OF IFC's HeldandDisbursedPortfolio InMillions of USDollars ~~ Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1998 SEFEndeavor 0.15 0.00 0.00 0.00 0.15 0.00 0.00 0.00 1998100 SEFSettha 0.86 0.00 0.00 0.00 0.86 0.00 0.00 0.00 2001 SEFVilla Santi 1.15 0.00 0.00 0.00 1.15 0.00 0.00 0.00 Total portfolio: 2.16 0.00 0.00 0.00 2.16 0.00 0.00 0.00 ~ ~ ~~ Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2005 Millicom Lao 4.00 ~ ~~ Total pendingcommitment: 4.00 0.00 0.00 0.00 A 234 Annex 21: Countryat a Glance LAOPEOPLE'SDEMOCRATICREPUBLIC NamTheun2 HydroelectricProjectandNamTheun2 Social andEnvironmentProject Lao PDR at a dance 3/10/05 East POVERTYand SOCIAL Lao Asia & Low- PDR Pacific Income I Developmentdiamond` 2003 Population,mid-year (millions) 5.7 1,855 2,310 Lifeexpectancy GNI per capita(Atlas method, US$) 340 1,060 450 1 GNI (Atlas methcd, US$billions) 1.9 2,011 1,038 Average annual growth, 1997-03 Population(%) 2.6 1.o 1.9 Laborforce ("A) 2.4 1.1 2.3 GNI Gross per primary Most recent estimate (latest year avallable, 1997-03) capita enrollment PovertyPAofpopulationbelownationalpovertyline) 33 Urbanpopulation(% of totalpopulation) 25 40 30 Lifeexpectancy at birth (years) 55 69 58 1 Infantmortality(per 1,000 live births) 82 32 82 I Chiid malnutrition(% of childrenunder5) 15 44 Access to improvedwater source Accessto an improvedwater source (% of population) 37 76 75 Illiteracy("A ofpopulationage 1%) 47 10 39 Gross primary enrollment ("A of school-aQepopulation) 111 92 -Lao PDR Male 112 99 __ Low-IncomeWOUD Female 111 85 KEY ECONOMIC RATIOSand LONG-TERMTRENDS 1983 1993 2002 2003 Economicratios' GDP (US$billions) 1.3 1.8 2.1 Grossdomestic investmenffGDP 19.5 22.0 Exportsof goods and seNicedGDP 21.5 28.4 26.5 Trade Gross domestic savingdGDP I Grossnationalsavings/GDP 14.1 16.5 T Currentaccount baiance/GDP -7.8 -5.2 -5.4 Interestpayments/GDP 0.3 1.6 1.7 Total debWGDP 149.5 88.8 104.0 Total debt service/exports 8.4 14.6 16.2 Presentvalue of debffGDP 58.6 Presentvalueof debWexports 218.7 Indebtedness ~ 1983-93 1993-03 2002 2003 2003-07 1 (average annualgrowth) GDP 4.8 6.2 5.8 5.3 6.4 -Lao PDR GDP per capita 2.3 3.5 2.9 2.5 3.6 Low-incomeorow Exportsof goodsand services STRUCTUREof the ECONOMY 1983 1993 2002 2003 1 Growth ofinvestmentand GDP( O h ) (% of GDP) 1 Agriculture Industry Manufacturing 13.1 19.1 Services 24.7 25.0 25.5 Privateconsumption Generalgovernmentconsumption 9.2 4.9 4.9 Importsof goods and services -GDi -O-GDP 1983-93 1993-03 2002 2003 (average annualgrowth) Agriculture 3.7 4.8 4.0 2.2 Industry 9.9 10.2 10.1 10.0 Manufacturing 12.7 10.7 13.0 6.3 SeNices 3.8 6.6 5.8 6.9 Privateconsumption Generalgovernmentconsumption Grossdomestic investment Importsof goodsand sewices Note: 2003 dataare preliminaryestimates. * The diamondsshow four key indicatorsin the country(in bold)comparedwith its income-groupaverage. If data are missing,the diamondwill be incomplete. A 235 PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Inflation("YO) Domestic prices I ("hchange) 150 Consumer prices 10.6 15.5 100 Implicit GDP deflator 11.2 10.6 13.9 50 Government finance (% of GDP,includes current grants) 0 Current revenue 14.4 13.2 98 99 00 01 02 03 Current budget balance 6.3 5.7 Overall surplus/deficit -4.0 -5.6 I -GDP deflator -0-CPI I TRADE 1983 1993 2002 2003 (US5millions) Export and import levels (US$ mill.) Total exports (fob) 241 341 401 I 700 T Wood products 66 94 94 Agriculture 9 27 26 Manufactures 67 105 105 Total imports (cif) 432 570 618 Food 93 100 Fuel and energy 29 0 0 Capital goods 99 210 231 1 Exportprice index (1995=100) 102 118 97 98 99 00 01 02 O3 I Import price index (1995=100) 105 106 Terms of trade (1995=100) 97 109 BALANCE of PAYMENTS 1983 1993 2002 2003 (US$ millions) 1 Current account balance to GDP ("YO) 1 Exportsof goods and services 332 517 554 Imports of goods and services 490 613 673 Resource balance -158 -96 -119 Net income 3 -70 -81 Net current transfers 0 51 71 67 Current account balance -121 -104 -95 -113 Financing items (net) 133 118 150 133 Changes in net reselves -12 -14 -55 -20 Memo: Reserves includinggold (US5 millions) 196 216 Conversion rate (DEC, /ocal/US$) 35.0 716.3 10,116.0 10,572.0 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ mi//ions) Composition of 2003 debt (US$ mlll.) Total debt outstandingand disbursed 451 1,985 1,614 2,171 IBRD 0 0 0 0 IDA 19 217 435 465 Total debt service 4 29 76 91 IBRD 0 0 0 0 IDA 0 2 9 11 Compositionof net resourceflows Official grants 11 69 115 123 Official creditors 56 54 60 75 Privatecreditors 0 0 0 0 Foreigndirect investment 0 30 60 69 Porffolioequity 0 0 0 0 I D: 885 World Bank program Commitments 0 19 45 25 A . IBRD E -Bilateral Disbursements 5 38 33 48 B. IDA D. Other multilateral F Private - Principal repayments 0 1 6 7 C. IMF G Short-term . Net flows 5 38 27 42 Interestpayments 0 1 3 4 Net transfers 4 36 24 36 DevelopmentEconomics 3110/05 A 236