Document of The World Bank FOR OFFICIAL USE ONLY Report No: ICR00004397 IMPLEMENTATION COMPLETION AND RESULTS REPORT LOAN 8034-PE ON A LOAN IN THE AMOUNT OF US$50 MILLION TO THE REPUBLIC OF PERU FOR A SECOND RURAL ELECTRIFICATION ( P117864 ) February 21, 2018 Energy & Extractives Global Practice Latin America And Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective {Nov 09, 2017}) Currency Unit = Nuevo Sol 3.23 Nuevo Soles = US$1 US$ 0.31 = SDR 1 FISCAL YEAR July 1 - June 30 Regional Vice President: Jorge Familiar Calderon Country Director: Alberto Rodriguez Senior Global Practice Director: Riccardo Puliti Practice Manager: Antonio Alexandre Rodrigues Barbalho Task Team Leader(s): Janina Franco ICR Main Contributor: Enrique Crousillat ABBREVIATIONS AND ACRONYMS ADINELSA Administration Office of Electric Infrastructure CPS Country Partnership Strategy CO2 Carbon dioxide DCF Directorate of Competitive Funding DGER General Directorate of Rural Electrification DO Development Objective DP-DGER Directorate of Projects EDC Electricity Distribution Company EIRR Economic Internal Rate of Return FONAFE National Fund for Financing the Entrepreneurial Activity of the State FOSE Fund for Social Compensation of Electricity FRR Financial Rate of Return FY Fiscal Year GDP Gross Domestic Product GEF Global Environmental Facility GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH GNI Gross National Income GoP Government of Peru GWh Giga-Watt/hour IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report IFR Financial Monitoring Report ISP Institutional Support Platform to promote productive uses of electricity ISR Implementation Status and Results Report kWh Kilo-Watt/hour LED Light-emitting diode, a high electrical efficiency lamp MEF Ministry of Economy and Finance MEM Ministry of Energy and Mines M&E Monitoring and Evaluation MTR Mid-Term Review MWh Mega-Watt/hour NGOs Non-Governmental Organizations NPV Net Present Value OSINERGMIN Supervisory Commission for Energy and Mining Investment O&M Operation & Maintenance PAD Project Appraisal Document PDO Project Development Objective PNER National Plan for Rural Electrification PPAR Project Performance Assessment Report PU Project Unit PV Photovoltaic RE Rural Electrification RE1 First Rural Electrification Project ROW Right of Way SHS Solar Home System SME Small and Medium-sized Enterprises SNIP National System of Public Investment SOE Statement of Expenses SWER Single-wire earth return TA Technical Assistance VAT Value Added Tax WTP Willingness to Pay TABLE OF CONTENTS DATA SHEET .......................................................................................................................... 1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ....................................................... 5 A. CONTEXT AT APPRAISAL .........................................................................................................5 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) .......................................8 II. OUTCOME ...................................................................................................................... 9 A. RELEVANCE OF PDOs ..............................................................................................................9 B. ACHIEVEMENT OF PDOs (EFFICACY) ...................................................................................... 10 C. EFFICIENCY ........................................................................................................................... 11 D. JUSTIFICATION OF OVERALL OUTCOME RATING .................................................................... 12 E. OTHER OUTCOMES AND IMPACTS (IF ANY) ............................................................................ 12 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ................................ 13 A. KEY FACTORS DURING PREPARATION ................................................................................... 13 B. KEY FACTORS DURING IMPLEMENTATION ............................................................................. 14 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 16 A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................ 16 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 17 C. BANK PERFORMANCE ........................................................................................................... 18 D. RISK TO DEVELOPMENT OUTCOME ....................................................................................... 19 V. LESSONS AND RECOMMENDATIONS ............................................................................. 19 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ........................................................... 22 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ......................... 29 ANNEX 3. PROJECT COST BY COMPONENT ........................................................................... 31 ANNEX 4. EFFICIENCY ANALYSIS ........................................................................................... 32 ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 36 ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) ..................................................................... 37 The World Bank Second Rural Electrification ( P117864 ) DATA SHEET BASIC INFORMATION Product Information Project ID Project Name P117864 SECOND RURAL ELECTRIFICATION ( P117864 ) Country Financing Instrument Peru Specific Investment Loan Original EA Category Revised EA Category Partial Assessment (B) Partial Assessment (B) Organizations Borrower Implementing Agency Republic of Peru MINEM - Ministerio de Energia y Minas Project Development Objective (PDO) Original PDO The development objective of the Project is to increase access to electricity in rural areas of Peru on an efficient and sustainable basis. It would build on the achievements of the First RE Project but would operate in more challenging conditions, providing electricity service in localities that are increasingly distant from the grid and with more dispersed populations. PDO as stated in the legal agreement The objective of the Project is to increase access to electricity in rural areas of the Borrower on an efficient and sustainable basis. Page 1 of 37 The World Bank Second Rural Electrification ( P117864 ) FINANCING Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing 50,000,000 43,834,175 43,834,175 IBRD-80340 Total 50,000,000 43,834,175 43,834,175 Non-World Bank Financing Borrower 10,601,000 10,601,000 7,373,870 Local Sources of Borrowing 22,104,000 22,104,000 14,416,877 Country Total 32,705,000 32,705,000 21,790,747 Total Project Cost 82,705,000 76,539,175 65,624,922 KEY DATES Approval Effectiveness MTR Review Original Closing Actual Closing 21-Apr-2011 13-Jul-2011 10-Feb-2014 28-Feb-2016 31-Aug-2017 RESTRUCTURING AND/OR ADDITIONAL FINANCING Date(s) Amount Disbursed (US$M) Key Revisions 23-Apr-2012 0 Other Change(s) 20-May-2015 14.54 Change in Loan Closing Date(s) 06-Nov-2015 23.81 Reallocation between Disbursement Categories 28-Feb-2017 44.30 Change in Loan Closing Date(s) 08-Aug-2017 44.58 Cancellation of Financing Reallocation between Disbursement Categories KEY RATINGS Outcome Bank Performance M&E Quality Satisfactory Satisfactory High Page 2 of 37 The World Bank Second Rural Electrification ( P117864 ) RATINGS OF PROJECT PERFORMANCE IN ISRs Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 10-Aug-2011 Satisfactory Satisfactory 0 02 01-Mar-2012 Moderately Satisfactory Moderately Satisfactory 0 03 17-Oct-2012 Moderately Satisfactory Moderately Satisfactory 0 Moderately 04 07-Jul-2013 Moderately Unsatisfactory 0 Unsatisfactory Moderately 05 22-Feb-2014 Moderately Unsatisfactory 1.10 Unsatisfactory Moderately 06 29-Apr-2014 Moderately Unsatisfactory 1.29 Unsatisfactory Moderately 07 20-Jul-2014 Moderately Unsatisfactory 3.73 Unsatisfactory Moderately 08 13-Dec-2014 Moderately Satisfactory 6.79 Unsatisfactory 09 22-Apr-2015 Moderately Satisfactory Moderately Satisfactory 13.71 10 14-Dec-2015 Moderately Satisfactory Moderately Satisfactory 24.43 11 31-May-2016 Moderately Satisfactory Moderately Satisfactory 30.29 12 09-Dec-2016 Satisfactory Moderately Satisfactory 40.23 13 07-Jun-2017 Satisfactory Moderately Satisfactory 44.58 SECTORS AND THEMES Sectors Major Sector/Sector (%) Energy and Extractives 100 Energy Transmission and Distribution 80 Renewable Energy Solar 20 Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Page 3 of 37 The World Bank Second Rural Electrification ( P117864 ) Urban and Rural Development 100 Rural Development 100 Rural Infrastructure and service delivery 100 Environment and Natural Resource Management 100 Climate change 100 Mitigation 100 ADM STAFF Role At Approval At ICR Regional Vice President: Pamela Cox Jorge Familiar Calderon Country Director: Laura Frigenti Alberto Rodriguez Senior Global Practice Director: Laura Tuck Riccardo Puliti Antonio Alexandre Rodrigues Practice Manager: Philippe Charles Benoit Barbalho Task Team Leader(s): Victoria Susan Bogach Janina Andrea Franco Salazar ICR Contributing Author: Enrique O. Crousillat Page 4 of 37 The World Bank Second Rural Electrification ( P117864 ) I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES A. CONTEXT AT APPRAISAL Context Electricity sector. Peru’s power sector was reformed in 1992, resulting in a radical structural unbundling and the creation of the regulatory body OSINERGMIN. Cost-based tariffs were introduced, and generation and transmission were largely privatized. Private companies are responsible for electricity distribution in Lima and a few other urban centers. In the rest of the country, including rural areas, electricity service is provided by public utilities. Distriluz, comprising four regional companies (Electro Centro, Electro Noroeste, Hidrandina and Electro Norte) is the largest public company with about two million customers. In total, there are twenty public distribution companies which operate under the control of the National Fund for Financing the Entrepreneurial Activity of the State (FONAFE), an entity that oversees budgets and investments of public companies in all sectors. Within the Ministry of Energy and Mines (MEM), the General Directorate of Rural Electricity (DGER) is responsible for rural electrification through two sub-directorates. The Directorate of Projects (DP) uses a centralized model whereby the DP constructs and fully subsidizes projects that are then transferred to distribution companies or to ADINELSA, a Government- owned holding company. The Directorate of Competitive Funds (DCF) co-finances World Bank supported projects that are developed, constructed and operated by the distribution companies. Rural Electrification (RE). In 2007, the rural electricity coverage in Peru was 30 percent, versus 91 percent in urban areas, a low level of rural access for a middle-income country. There was also a wide disparity in electrification among regions. The Government of Peru (GoP) was engaged in an ambitious effort to increase electrification and reduce the gap between urban and rural areas. Public investment in rural electrification increased markedly, taking advantage of the country’s macroeconomic health, and effective approaches were adopted, such as: (i) involving the electricity distribution companies (EDCs) and regional governments in projects; (ii) financing arrangements addressing the gap between cost-reflective tariffs and the new users’ affordability, including waiving the connection fee to low-income rural users; (iii) using individual solar home systems (SHS) to serve remote populations that could not be reached in an economic way from the grid; and (iv) using low-cost technologies for grid extension (mainly single-wire earth return - SWER). As a result of the joint efforts of MEM, EDCs and local governments, rural electricity coverage more than doubled in the five-year period from 29.9 percent in 2007 to 68.5 percent by end 2012. The first Bank-assisted Rural Electrification Project (RE1) contributed significantly towards meeting the GoP’s goals. With the support of a US$50 million IBRD loan and a US$10 million GEF grant, the RE1 development objective was to increase rural access to efficient and sustainable electricity services. The RE1 Project met all its targets with the exception of a Small Hydro Financing Facility that was cancelled due to changes in the GoP’s renewable energy policy that improved access to commercial financing for such projects. The main outputs of RE1 were as follows: • Installation of connections to over 105,000 mostly poor rural households, including schools, clinics and community centers, increasing rural electricity coverage by 5.9 percent. • Successful demonstration of a framework for rural electrification where the distribution companies developed, constructed and co-financed electrification subprojects. • Development of an innovative model for electricity distribution companies to provide service using PV systems, based on national regulated tariffs and access to the FOSE cross-subsidy. The RE1 financed PV systems to provide electricity service to 7,100 households. • Demonstration of a pilot program for productive uses of electricity that reached 21,111 enterprises and family producers that adopted electricity using equipment to increase productivity. Page 5 of 37 The World Bank Second Rural Electrification ( P117864 ) • The GEF-assisted activities made contributions to renewable energy development that went beyond the CO2 reduction target, including a national tariff for regulated PV systems, pre-investment studies on renewable energy sources and supporting the promotion of productive uses in areas with predominantly renewable energy. A Project Performance Assessment Report (PPAR) on the RE1 Project was issued by the Bank’s Independent Evaluation Group (IEG) in 2017. The PPAR confirmed IEG’s upgrade of the RE1’s outcome rating from Moderately Satisfactory to Satisfactory. The PPAR drew valuable lessons that focus on: (i) innovative RE activities, specifically, the promotion of productive uses of electricity and PV systems for isolated areas; and (ii) the overall sustainability of RE efforts in Peru. The lessons are summarized in the box below. Box 1.1. Summary of Lessons of the PPAR for the Peru RE1 Project (with Bank management revision) The promotion of productive uses of electricity needs adequate levels of TA and investment support, without which their sustainability is put at risk. The benefit has been demonstrated, starting as an innovative pilot, promotion activities have been mainstreamed. However, the Project’s Institutional Support Platform (ISP) to promote productive uses needs reinforcement to sustain its positive outcomes, (i) the GoP has to maintain its political and technical support; (ii) NGOs, together with the ISP, need to continue to work with individual producers; and (iii) electricity distribution companies (EDCs) have to revive their leadership. Achieving the financial sustainability of PV systems remains a challenge that the Government and EDCs need to address. Given the remote and isolated conditions where PV systems are installed, EDCs need to identify low-cost maintenance measures and effective billing systems. Users also need adequate training in the use and maintenance of the batteries and the PV units. The RE model of mobilizing EDC’s financing and active involvement, mainstreaming productive uses of electricity, and installing PV systems has been proven to work, but the GoP and EDCs need to enhance cooperation to reach “the last mile” while ensuring sustainability. Going forward, the GoP may need to exercise greater flexibility on market structure, regular updates on the regulatory regime and more frequent revisions of the tariff regime to accommodate to the rapid expansion of rural customers and their higher distribution costs. EDCs need to continue their financial contributions. Rationale for Bank assistance. The 2007-2011 World Bank’s Country Partnership Strategy (CPS) for Peru was designed to support the country’s efforts to increase economic growth and fight po verty. It backed Government reforms that sought to strengthen fiscal management and to ensure a favorable environment for the development of the private sector, focusing on the efficiency and quality of public spending, as well as improved competitiveness. The rural electrification activities proposed in the Second Rural Electrification Project (the Project) were designed and built from the experience of the RE1 and were consistent with two main pillars of the CPS: social development and economic growth. The RE1 alone increased rural electricity coverage by about 5.9 percent nationwide. The Second Project aimed to continue increasing electricity coverage, thus helping reduce inequality and contributing to broader based social development and economic growth. The successful and valuable experience of the RE1 encouraged the Bank to continue its contribution in reducing the country’s electricity gap. Page 6 of 37 The World Bank Second Rural Electrification ( P117864 ) Theory of Change (Results Chain) The objective of increasing access to electricity in rural areas on an efficient and sustainable basis was to be achieved directly through the implementation of a rural electrification investment component that increased the number of electricity connections through grid-extension and off-grid subprojects. The Project was to continue using the successful model of the RE1 based on: (i) partnership with distribution companies that proposed, co-financed, developed, constructed and operated the RE subprojects, to ensure their efficiency, and financial and technical sustainability; (ii) pioneering of regulated SHS service by distribution companies to cost-effectively and sustainably extend service to people living in isolated areas; and (iii) promoting productive uses of electricity that aimed to increase rural production and incomes through electrical equipment, as well as to increase the financial sustainability of subprojects by increasing the use or electricity in rural grids. The subprojects were complemented by a technical assistance component tailored to assist the stakeholders (government, distribution companies, NGOs, consumers) to improve the efficacy and sustainability of the rural access effort. Project Development Objectives (PDOs) The development objective of the Project was to increase access to electricity in rural areas of Peru on an efficient and sustainable basis. Key Expected Outcomes and Outcome Indicators Achievement of the PDO was assessed using the following key indicators: i. electricity distribution system infrastructure installed with capacity to connect and serve 42,500 households and small enterprises; 
 ii. 34,000 rural households and small enterprises connected during the life of the Project;1 
 iii. number of households and small enterprises connected using individual solar photovoltaic systems (with no quantitative target); 
 iv. 5,000 rural family productive units to adopt electricity using equipment under the productive uses activities. Components Component 1: Rural Electrification Subprojects. This component would support investment in infrastructure by electricity distribution companies to provide electricity services to about 42,500 households, small enterprises and community facilities (benefiting about 174,000 people). The financing mechanisms included: (i) subsidies to partially finance the capital costs of electricity access projects proposed and implemented by electricity service providers (distribution companies); (ii) the distribution company would finance part of the investment; and (iii) the subsidy provided would vary and would be calculated for each grid extension subproject as the amount required to yield the permitted return on the company’s investment at the current tariff. Subprojects to be financed would include the extension of the electricity grid and the installation of solar photovoltaic (PV) systems. Extension of the electricity grid consists of the construction of medium and low voltage transmission lines and substations with limited social and environmental impact. Individual PV systems would include a PV module, controller, battery and several fluorescent lamps. Component 2: Technical Assistance (TA) for Rural Electrification. This component would build on and complement activities under the RE1 Project, focusing on: (a) promotion of productive uses of electricity; (b) assessment of 1 It was expected that an additional 8,500 households and small enterprises would receive electricity connections after the close of the Project, fully utilizing the installed capacity for 42,500 connections within a few years after Project closure. Please note the connections number discrepancy as the PAD (pg.5, footnote 1) states that an additional 7,500 (instead of 8,500) connections would be provided. Page 7 of 37 The World Bank Second Rural Electrification ( P117864 ) renewable energy resources including pre-feasibility studies for small to medium hydropower projects, and social and environmental aspects; (c) assistance to distribution companies and other stakeholders to prepare PV projects and improve the capacity to develop and monitor rural grid extension projects; and (d) improvement in regulation of rural electrification and investigation of its impacts, improved monitoring of rural service quality and socio-economic assessment of the impacts. Component 3: Project Management. Under this component, the DGER, through the Project Unit, would carry out the following activities: (a) evaluate and supervise investment subprojects and manage TA; (b) management and administration (procurement and financial management); and (c) monitoring and evaluation, including of safeguards. The following table presents the estimated and actual allocation of resources for each component (US$ million). Components GoP IBRD Service Total Providers Component 1: Rural Electrification PAD est. 2.825 48.375 10.400 61.600 Subproject Actual 0.000 40.940 6.375 47.316 Component 2: TA for Rural PAD est. 2.909 1.500 0.000 4.409 Electrification Actual 3.618 2.300 0.000 5.918 Component 3: Project Management PAD est. 3.561 0.125 0.000 3.686 Actual 3.631 0.594 0.000 4.225 Total Project Cost PAD est. 9.295 50.000 10.400 69.695 Actual 7.249 43.834 6.375 57.459 Front-end fee PAD est. 0.125 0.000 0.000 0.125 Actual 0.125 0.000 0.000 0.125 Valued Added Tax PAD est. 1.181 0.000 11.704 12.885 Actual 0.000 0.000 8.042 8.042 Total Financing PAD est. 10.601 50.000 22.104 82.705 Actual 7.374 43.834 14.417 65.625 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) Revised PDOs, Outcome Targets and Indicators No changes were made to the original PDO or the related performance indicators. Revised Components No revisions were made on any of the original Project components. Page 8 of 37 The World Bank Second Rural Electrification ( P117864 ) Other Changes The Project was approved on April 21, 2011, and became effective on July 13, 2011. The Bank project team undertook five Level II restructurings aimed at enabling the Project to be completed successfully to changing conditions. These restructurings were as follows: (i) April 23, 2012 to change the definition in the loan agreement of a "Rural Electrification Provider;" (ii) May 20, 2015, for a one-year extension of the closing date from February 28, 2016 to February 28, 2017, to ensure the completion of Phase 2 sub-projects; (iii) November 6, 2015, for a reallocation of loan proceeds between categories and components, from Component 1 (US$1.313 million) to Components 2 (US$0.812 million) and 3 (US$0.501 million); (iv) February 28, 2017, for a six-months extension of the closing date from February 28, 2017 to August 31, 2017; and (v) August 8, 2017, for the cancellation of US$5,423,275.46 of undisbursed balance.2 Rationale for Changes and Their Implication on the Original Theory of Change Loan extensions were justified in order to provide enough time to complete final works and, thus, ensure that the Project achieved its DO, as well as to comply with safeguard policies regarding completion of right-of-way payments. In total, the loan was extended for eighteen months. Other changes were minor adjustments to a definition and the allocation of loan proceeds. There were no changes to any project components and the restructurings had no implications to the original Theory of Change. II. OUTCOME A. RELEVANCE OF PDOs Assessment of Relevance of PDOs and Rating The Project’s objective of increasing access to efficient and sustainable electricity service in rural areas of Peru remains highly relevant in the light of the continuous GoP commitment to poverty reduction and rural development. Rural electricity coverage reached 78 percent by end 2015. The National Plan for Rural Electrification for the 2013-2022 period sets higher goals for rural electricity coverage: 92.4 percent by 2020. Following the positive experience of the RE1, as confirmed by the PPAR, the design of the Project was fully consistent with its development objectives and, hence, it was highly relevant. The Project included a delivery model that directly addressed the electricity access and sustainability objectives, complemented by a promotion of productive uses of electricity component to enhance the benefits of the said investments. The TA components included the elements necessary to ensure the Project’s successful implementation and sustainability, such as the promotion of productive uses of electricity, studies in support of the development of renewable energy, assistance to distribution companies/stakeholders to prepare PV and to develop and monitor rural grid extension projects, and continued improvement in regulation of rural electrification. In accordance with the latest CPS for FY12-FY16, the Bank Group’s aim was to help the Government achieve four objectives: (a) increased access and quality of social services for the poor; (b) connecting the poor to services and markets; (c) sustainable growth and productivity; and (d) inclusive governance and public sector performance. The Project is directly relevant to the current Bank strategy, mainly to objectives (a), (b) and (c) by facilitating increased access for rural people to electricity services, and promoting productive units among households and small businesses. 2After this cancellation of funds, an additional US$742,549 of unused funds were cancelled at the end of the grace period, on December 31, 2017, being the final disbursement amount US$43,834,175. Page 9 of 37 The World Bank Second Rural Electrification ( P117864 ) B. ACHIEVEMENT OF PDOs (EFFICACY) Assessment of Achievement of Each Objective/Outcome The objective of the Project was to increase access to electricity in rural areas of Peru on an efficient and sustainable basis. To do so, it would build on the achievements of RE1, but was expected to operate in localities that were increasingly distant from the grid and with more dispersed populations. Compliance with the key performance indicators associated with the PDO and Project components is presented in Annex 1. (a) Results of investment in RE subprojects (indicators: infrastructure established with the capacity to provide service to rural households in the long term, number of connections during the Project, and number of customers using PV systems) – High. The Project installed infrastructure with the capacity to connect 42,669 rural households (about 169,000 people), of which 36,518 (about 142,895 people) were connected during the implementation period, thus increasing the country’s rural electricity coverage by 2.1 percent. In both cases, i.e. capacity to connect and actual connections, the Project exceeded its targets, by 0.4 percent and 7.4 percent, respectively. The Project was instrumental in consolidating the rural electrification model used in the RE1 whereby EDCs were responsible for planning, developing, constructing, commissioning and operating grid extension and PV subprojects. During the implementation of the Project, the GoP introduced a set of legal measures that institutionalized this approach, permitting DGER to transfer resources to the EDCs for rural electrification subprojects. The Project was also instrumental in consolidating an innovative model for regulated service by EDCs using solar PV systems to serve people that could not be reached by the grid, based on regulated national tariffs and access to the FOSE cross-subsidy. The establishment of the regulated service –achieved with TA support of RE1– was an important accomplishment in addressing the sustainability of PV systems and constitutes a pioneer effort in Latin American. Electricity connections using individual PV systems reached 11,915. While the PAD’s monitoring framework did not include a quantitative target for this indicator,3 the number of connections achieved exceeded by 68 percent the connections of RE1, a highly satisfactory outcome considering the adverse circumstances faced during implementation. In fact, this subcomponent was compromised by a massive solar household PV program introduced by the GoP that threatened to crowd-out the market and even put on hold the PV sub-component.4 Facing this compromising situation, the Bank team maintained a patient dialogue until the GoP acknowledged the value of the Project’s proposal and restored its support. The Project supported EDCs by developing tools for lower cost O&M of the PV systems and effective commercial arrangements for billing and collection among dispersed operations. The Project also developed a platform for the DGER to monitor the status of all PV systems. These tools can be used in the implementation of the massive solar household PV system program as well as in EDC off-grid subprojects. The Project also carried out a campaign to inform beneficiaries about the efficient use of electricity in LED lights and efficient appliances, and the safety of internal electricity installations, that contributed to efficient and sustainable electricity service provision. Training was provided to over 9,600 people and 12,280 training kits were distributed.5 3 During the implementation of the RE1 Project the PV component was considerably delayed because of exogenous regulatory factors, hence it was decided at appraisal not to include a target for PV connections, i.e. the indicator was meant to be tracked without a specific quantitative target. 4 Based on successful auctions for grid-connected renewable energy, the new administration in MEM announced in July 2013 a massive SHS program aiming for installation of 500,000 SHS. In May 2015, a scaled down contract for 180,000 SHS was signed with Ergon Peru. The contract has faced significant delays. By design, EDCs are responsible for commercial aspects of the program, i.e. billing and collection. 5 Kits included materials on the benefits and added value associated with efficient lighting equipment (especially LED lamps) and other Page 10 of 37 The World Bank Second Rural Electrification ( P117864 ) (b) Promotion of productive uses of electricity (indicator: number of household productive units adopting electricity using equipment additional) – Substantial. Three contracts with NGOs for the promotion of productive uses were completed by Project close. Project activities supported family producers, small and micro-enterprises, and cooperatives to adopt electricity and use it for multiple purposes. It is estimated that the program has benefited directly 4,376 rural producers, including 1,569 women producers. Although the number of productive units adopting electricity using equipment fell short of the target (5,000), these units have been larger than expected, as the additional electricity consumption attributed to this equipment exceeded by 112 percent the intermediate results target. A factor that contributed to the DO target not being met fully was the decision to use a significant part of the funds for the productive uses activities (18 percent) to finance a forum to disseminate the Project’s experience with productive uses promotion within Peru and Latin America.6 The socio-economic impact of the RE1 productive uses activities was evaluated under the Project. This evaluation confirmed the positive impact on both producers and rural electricity systems, as incomes of participating producers were estimated to have increased by 6 percent annually and their average consumption increased from 56 to 240 kWh/month. Justification of Overall Efficacy Rating Overall, the Project’s performance in achieving its PDOs is considered to be High. The Project met or surpassed all its development objectives targets, with the exception of the productive use of electricity activity that achieved 87.5 percent of the target. Intermediate results indicators were largely met in a similar fashion. The Project’s contribution in increasing rural electrification access is expected to be sustainable since rural electrification subprojects have been developed, constructed and are being operated by EDCs that have a demonstrated technical and commercial capacity. Also, EDCs operate within a stable regulatory framework that promotes efficiency and has historically guaranteed the financial sustainability of efficient operations. C. EFFICIENCY Assessment of Efficiency and Rating The Project’s design and implementation paid special attention to an efficient use of resources. It maintained the same organization of the RE1 project that had proven to be work efficiently. Further, the Project yielded positive economic returns as foreseen at appraisal. Consequently, the Project’s rating for efficiency is considered to be Substantial. The design of the component on Rural Electrification Subprojects aimed to ensure efficiency, as the selection of subprojects required that each be economically and financially viable, taking into account the capital cost subsidy. Subsidies were calculated at the level required to allow the service provider to invest and earn the rate of return specified by law.7 On this basis, the average distribution company investment, excluding VAT, for grid extension projects was electrical appliances, and on the safety of electrical installations inside and outside the household. Materials included: images about the campaign, a poster illustrating safe internal electrical installations, information on safety measures and energy efficiency of lighting fixtures and appliances, and meter reading sheets to teach consumption control. 6 The forum affirmed the promotion of productive uses of electricity as a means to make RE more sustainable and to promote rural development, examining lessons from Peru as well other countries. It was held on November 2-3, 2016 with participation of more than 200 representatives of electricity distribution companies, the beneficiary producers, ministries, local governments, public and NGOs, as well as participants from Argentina, Bolivia, Colombia, Haiti and the US. 7 The grid-connected subprojects were proposed and prepared by the EDCs and then approved by the SNIP system. Subprojects were subsidized up to the level required for the projects to earn the permitted rate of return by the companies. The PV projects were also proposed and prepared by the EDCs, with one criteria being that these areas could not be economically reached by the extension of Page 11 of 37 The World Bank Second Rural Electrification ( P117864 ) 14.3 percent, ranging from 11.5 to 19.8 percent, and a fixed 10 percent for PV projects. Including VAT, the average EDC participation increased to 26 percent overall. The average costs per connection were US$1,268 and US$1,011 for grid extension and PV sub-projects, respectively, which compare with US$1,628 and $1,000 considered at appraisal. The lower costs achieved by the grid extension sub-projects is explained mainly by a depreciation of the local currency that reduced considerably the US$ cost of the local components, and the fact that during the final stage (Phase 2) the Project achieved lower costs. The total cost of the Project is estimated at US$65.6 million as compared to the original estimate of US$82.7 million. Thanks to the unforeseen depreciation of the local currency, plus an efficient execution, the Project achieved its targets at a considerably lower cost. Consequently, US$6.17 million of the IBRD loan proceeds remained unused. The Project’s economic internal rate of return is estimated at 18.3 percent.8 The EIRRs for the grid extension and off-grid PV sub-components are estimated to be 20.4 percent and 10.9 percent respectively. These results compare to EIRRs of 20.1 percent and 16.2 percent estimated at appraisal for the same components. The lower economic return (lower than the PAD’s) achieved by the off-grid component is attributed to the use of a more conservative estimation of the economic benefits, although unit costs were slightly lower. D. JUSTIFICATION OF OVERALL OUTCOME RATING A Satisfactory rating is assigned based on the high relevance of the Project’s objectives and innovative design, and its positive outcomes in terms of the efficacy and efficiency of its components. It is worth noting that the Project’s contribution goes beyond the Peruvian context as the successful experience of the Peruvian Government in implementing innovative approaches is being studied by countries in Latin America as well as in other regions. E. OTHER OUTCOMES AND IMPACTS (IF ANY) Gender and Poverty Reduction Project components were targeted toward low-income rural areas. Access to electricity has brought many benefits to low income population, including women and indigenous people, as shown by surveys undertaken by the Project monitoring team. About 34 percent of the beneficiaries of the Project’s new electricity connection are women. Also, 17 of the 31 subprojects were implemented in locations that included indigenous people, accounting for 15 percent or about 21,000 of the Project beneficiaries. Among other Project contributions, beneficiaries noted that the number of productive hours was extended by improved lighting, thus enabling social and productive processes to take place over a longer span of hours. Electric lighting provides a healthy living environment (e.g. better indoor air quality and higher quality light, fewer respiratory illnesses and accidents from kerosene lighting, and more leisure time), health clinics (e.g. refrigerators for vaccines), and enables access to information through different means of communication (e.g. television, computers) thus enhancing education, as well as entertainment. Women were appreciative of improved safety as a result of street lighting. In combination with indoor electrical lighting, this has resulted in more evening social activities, as well as increased study time by young people. Please see the link to a video describing the experience of women-led Small and Medium-sized Enterprises (SME) that adopted electrical equipment to increase their productivity and incomes at: https://worldbankgroup.sharepoint.com/portals/hub/_layouts/15/PointPublishing.aspx?app=video&p=p&chid=f4c8b91 9-1e3b-470a-9c17-2a6619065828&vid=1219f07f-5939-4a2a-9501-ec698086efee In the productive uses promotion activity, 36 percent of the productive units were led by women. The implementation approach, while not deliberately designed with gender in mind, was effective in reaching women producers. The result the electricity grid. 8 It should be noted, however, that these are conservative estimates of the Project’s economic performance because the benefits of the productive uses component are only partially incorporated. Page 12 of 37 The World Bank Second Rural Electrification ( P117864 ) came naturally as women entrepreneurs are represented in a broad range of productive activities and play a significant role in areas such as the production of baked goods, milk, ceramics, and textiles. As noted above (Section B. Efficacy), the socio-economic impact assessment of the RE1 productive uses component estimated that incomes increased by 6 percent annually. Institutional Strengthening The Project has had important impacts in strengthening institutions through the activities carried out in all components. Through their investment in rural electrification, EDCs continued strengthening their capacity to develop grid and off-grid RE projects and operate off-grid projects. Also, through the productive uses promotion component, the DGER, NGOs, and EDCs have all improved their capacity to assist rural entrepreneurs to adopt electrical equipment to improve their productivity and incomes. An unforeseen contribution of the Project stems from its experience in dealing with right-of-way payments, probably the most contentious safeguard issue that had to be dealt with. The protocol developed to address this difficult issue has the potential of being replicated in other sectors and countries, and actions for the dissemination of this experience are already underway.9 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME A. KEY FACTORS DURING PREPARATION The Project was well aligned with the CPS for 2007-2011 and the objectives of subsequent governments to invest in rural infrastructure and social inclusion. Project design was based on the successful experience of RE1. Additional valuable inputs were provided by a MEM Pre-Investment Study for the extension of RE1 (2011) and the joint MEM-Bank “Peru: National Survey of Rural Household Energy Use” (2010). Also, the PAD was supported by a thorough economic analysis that confirmed the Project’s rationale under several future scenarios. Project objectives were realistic and its design was simple, both in terms of the delivery model and the organization of the implementation agency. The role of EDCs was clearly established by the subsidy agreements reached between the DGER and each of the companies. Implementation arrangements were based on the same organizational structure used in the RE1, which consisted on a Project Unit (PU) that included three basic areas: technical; administrative, including financial and procurement; and monitoring and evaluation. The successful experience of the RE1, plus the Bank’s experience in other countries offered the following valuable lessons that were incorporated into the Project’s design: • Incorporate flexibility into the subproject eligibility criteria; 
 • Place responsibility for the implementation of proposed subprojects in the distribution companies, to ensure financial viability, efficiency and sustainability; 
 • Utilize data on average consumption in rural electrification systems from the RE1 Project and OSINERGMIN in evaluating viability of subprojects; 
 • Recognize in the indicators that the Project is constructing long-term infrastructure and that part of the potential connections will be realized after the Project closes; 
 9 MEM issued in 2012 a set of guidelines for addressing ROW and involuntary resettlement that established clearly the procedure to be followed. The guidelines contributed towards thorough work on the issues by distribution companies and minimized complaints of affected people. Page 13 of 37 The World Bank Second Rural Electrification ( P117864 ) • Include technical assistance activities to increase awareness of rural electricity users about electricity use, safety and opportunities for productive uses; 
 • Include costs of compensation for land use and mitigation of minor environmental damage in the cost of each subproject; and 
 • Support distribution companies’ compliance with social and environmental safeguards by providing practical tools and expert advice. 
 The Monitoring and Evaluation design was satisfactory, targets were realistic and measurable. Also, the results framework incorporated valuable lessons learned during the RE1. Section 4 elaborates further on this issue. Risks associated with policy, institutional, commercial and fiduciary aspects were identified at the preparation stage. Generally speaking, these risks did not materialize. However, the long-term sustainability of the PV component remains –to some extent– to be demonstrated. The change of government entailed two unanticipated factors of delay: (i) disruptions in the continuity of EDCs’ management, including significant delays in the appointment of their respective boards of directors; and (ii) the GoP’s proposal of a massive and difficult to implement off-grid solar program that threatened to crowd-out the PV market. The Project was expected to build on the RE1 experience, but would operate in more challenging conditions, providing electricity service in localities that are increasingly distant from the grid with more dispersed population. The Project’s targeted rural population was mainly in the Andean mountains, coastal desserts, and the Amazon jungle. 73 percent of all connections were located in remote rural areas while 33 percent of all connections were made using SHS in areas that were too isolated to be served cost-effectively by grid extension. While the Project kept this focus throughout most of its implementation, several of the grid extension subprojects of phase 2 were located in areas near the existing grid. The Project’s readiness for implementation was confirmed by its thorough preparation and the advantage of using the capacity and organizational arrangements of the RE1 project. B. KEY FACTORS DURING IMPLEMENTATION Component 1: RE subprojects, was implemented by seven state-owned EDCs and one private concessionaire (Entelin Peru SAC, working in off-grid PV subprojects in the region of San Martin) in thirteen regions. Thirty-one subprojects were approved for financing and executed in two stages (19 in phase 1 and 12 in phase 2), including seven PV off-grid subprojects. In aggregate, distribution companies contributed 14.3 percent of the capital costs of the grid extension subprojects and 10 percent of the capital cost of PV subprojects, excluding VAT which was paid by the companies. Component 2: Technical Assistance, which was executed by the PU, did not face difficulties and was completed as planned. The component was flexible enough to adapt to the requirements of different recipients: the MEM, EDCs and the PU itself. The Project was rated Moderately Satisfactory or Satisfactory throughout its implementation, with the exception of an eighteen-month period (May 2013 to November 2014) when its rating for Implementation Progress was downgraded to Moderately Unsatisfactory due to significant delays in the implementation of Component 1. The Mid-Term Review mission of February 2014 identified the following problems: • The slow start evidenced the urgent need to strengthen the Project’s leadership through the designation of the Project Director. • Disbursements reached US$ 1.29 million (only 2.6 percent of the loan), mostly on Component 2, while Component 1 was still in the bidding stage. • Due to a massive PV program of the GoP, it had been agreed that loan proceeds originally allocated to the PV sub- component would be used in additional grid-extension. Government support to the Project, from both MEM and the Ministry of Economy and Finance, was strong and usually Page 14 of 37 The World Bank Second Rural Electrification ( P117864 ) dependable. However, the Project did not gain momentum until mid-2014, three years after its effectiveness. The main reasons for this very slow start were: • Uneven political support associated with the change of Government.10 The natural cost of the transition, including the new administration’s lack of previous exposure to the Project, caused a delay of about one year in starting project activities. The situation was aggravated by an early cabinet crisis in the incoming government. • Delayed support of the EDCs expected to execute most RE subprojects, which was linked to: (i) delays in the appointment of the management teams and directors of most companies; and (ii) their resistance to continue with a rural activity that they perceived as adverse to their financial interest. In fact, EDCs had contributed more than originally envisioned during the RE1 project, since they had to bear cost overruns. • Lack of continuity in the management of the DCF (PU) and the DGER. The Project did not have a Director for 18 months. Further, changes in the DGER weakened the institutional knowledge and support to the Project. • A temporary suspension of the PV off-grid subcomponent as a consequence of the GoP’s massive PV initiative. • The Project was approved and became effective almost two years prior to the closing of RE1, which was unexpectedly delayed by problems with compensation payments.11 This meant that the PU remained engaged in the implementation of the RE1 during that prolonged period. • Progress was measured against a timetable that did not anticipate the possible problems inherent to a government transition. The PU and the Bank team played important roles in improving the Project’s performance. While project implementatio n improved dramatically in mid-2014, this was not free of problems. Safeguard factors affecting project implementation, though not its outcome, are addressed in the section 4. The following table presents the factors affecting project implementation, and the role –including corrective measures– played by the different participants. Factors That Affected Project Implementation and Corrective Measures Key factor Subject to government and/or implementing Subject to World Outside the control of gov’t entities control Bank control and/or other entities • Optimistic • A cabinet crisis in late 2011 Project delays; • Weak GoP support during initial years: delays timetable given delayed the appointment of significant delays in appointing management of EDCs as well as change in the management team and in Component 1 the management of DGER/DCF. government directors of distribution during the first • Initial resistance of EDCs. (shared with the companies. three years of • Late completion of RE1 and optimistic project implementation. GoP). • Adverse weather conditions planning (shared with the Bank). • The Bank team in early 2017 –heavy rain- • The DCF/PU took a pro-active role in provided delayed the execution of promoting RE sub-projects among distribution continuous phase 2 sub-projects. companies. support to the • The GoP took the following actions: (i) DGER and PU, established a high level Project Monitoring and was Committee with the Vice-Ministers of Finance instrumental in and Energy. The committee followed closely reaching high the project’s progress and took corrective level decision actions; (ii) appointed a Director to the DCF; makers and (iii) instructed FONAFE and Distriluz to fast- solving specific 10 The Project was approved in the last days of the Garcia administration and implemented by the then incoming Humala government. 11 The RE1 closed in June 30, 2013, 24 months after its original closing date and 26 months after the P roject’s board approval. Page 15 of 37 The World Bank Second Rural Electrification ( P117864 ) track implementation; and (iv) increased the implementation unit cost threshold for grid extension hurdles. connections from US$1,700 to US$2,000. • Massive PV program of MEM threatened to • The Bank kept a GoP proposal for a crowd-out the market and caused a continuous and massive PV temporary suspension of the project’s PV patient dialogue program activities. until the GoP (hundreds of • Acknowledging the Project’s value and the suspension thousand SHSs) slow start of the massive plan, MEM lifted the decision was suspension of the PV subcomponent. overturned. • The Project was completed 14% depreciation at lower cost; IBRD loan of the local balance of US$ 5.42 million currency during was cancelled. implementation • Problems in the register of potential clients Other factors that left out a few households. affected the • Temporary delays in the availability of efficacy of project implementation counterpart funds. • Some degree of overlap between a few subprojects and local government initiatives. IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME A. QUALITY OF MONITORING AND EVALUATION (M&E) M&E Design The M&E design was satisfactory. At Project appraisal, the number of indicators was limited to four DO indicators plus seven intermediate indicators that provided an adequate insight into the Project’s objectives and achievements. The targets established by the M&E framework were realistic and measurable, with the exception of Indicator Three (number of solar PV systems) that was to be tracked but did not include a target value. The results framework incorporated an important lesson learned during the RE1: to measure explicitly the Project’s capacity to provide an electricity service to rural households (i.e. the number of potential connections) in addition to the actual connections achieved during the implementation. M&E Implementation and Utilization Overall, the M&E framework provided a set of indicators suitable to measure the progress in achieving its DO; that is, it measured directly the ‘theory of change’ inherent to the Project. The DCF included a monitoring team that maintained accurate measures of the Project indicators. As stipulated in the loan agreement, within the framework of SNIP (National System of Public Investment, MEF), the DCF supplied to the Bank semester progress reports, including an update of results indicators. This progress was regularly reflected in 13 ISRs produced by the Bank team during implementation, data that was utilized in informing management and placing adequate emphasis and resources on the main issues of concern. The Project also produced two socio-economic impact assessments of the RE1 rural electrification and productive uses promotion components,12 that are useful for national and international evaluations of rural electrification, as exemplified 12 “Evaluación Socio-Económica de Sub-proyectos de Electrificación Rural” and “Evaluación de Resultados e Impacto del Componente 3 Promoción de Usos Productivos de la Electricidad”, 2016. See complete reference in Annex 6. Page 16 of 37 The World Bank Second Rural Electrification ( P117864 ) in the PPAR of the RE1.13 Additionally, the DFC carried out a survey of 511 beneficiaries of the Project’s rural electrification subprojects, based on a representative sample of 12 grid and PV subprojects, that investigated connection rates, use of electricity, quality of service and perceived benefits. Justification of Overall Rating of Quality of M&E Given its adequate design, systematic implementation and appropriate utilization the quality of the M&E is rated High. B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE a. Social and Environmental Safeguards. The Project triggered five World Bank safeguard policies as identified in the PAD. These were: Environmental Assessment (OP/BP 4.01); Natural Habitats (OP/BP 4.04); Indigenous Peoples (OP/BP 4.10); Physical Cultural Resources (OP/BP 4.11) and Involuntary Resettlement (OP/BP 4.12). The Project’s safeguards category was set as B. Environmental and social screening was required for all sub-projects prior to approval, and appropriate management plans were prepared and executed. Guidelines for the preparation and implementation of RE subprojects were developed and training was provided to EDCs and contractors to ensure good environmental and social practices. Social. The Indigenous Peoples Planning Framework and Involuntary Resettlement Policy Framework of the RE1 were revised and updated for the Project, to incorporate the lessons learned and ensure consistency with the policies of the GoP and the Bank. The frameworks required that each subproject had an approved Resettlement Plan and, in the case that indigenous peoples were present in the area, an Indigenous Peoples Development Plan. The Indigenous Peoples Planning Framework was consulted during project preparation with Asháninka and Quechua communities. Project implementation was particularly careful in: (i) taking measures to avoid conflicts through a consultation and participation strategy; (ii) providing capacity building to monitor compliance with the Bank’s operational policies at subproject level; (iii) supporting a communications strategy to allow information flows during implementation; and (iv) ensuring systematic documentation of complaints and the response to such complaints. The Project’s performance with regard to social safeguards was rated satisfactory throughout the entire implementation period.14 Nevertheless, there were considerable delays in the right-of-way (ROW) payments during the last year.15 These delays were among the reasons for the second extension of the loan’s closing date. Although many EDCs complied satisfactorily with the required payments,16 two companies lagged behind. DCF-DGER reports that 84 percent of the amount of the ROW payments –corresponding to 81 percent of the affected people– had been made by August 31, 2017.17 Obstacles faced in making ROW payments include, inter alia, the late execution of a few sub-projects, the absence or incomplete documentation of land titles, and difficulties in locating owners. The Project’s Component 2 provided support to EDCs to monitor the progress of ROW payments. It is worth noting that the experience gained in dealing with this safeguard has the potential of providing an unexpected benefit, as the protocols developed to address this difficult issue could be useful in other sectors and countries. Accordingly, actions for the dissemination of this experience are already underway. 13 See recent Livewire publication by Bank team “Promoting Productive Uses of Electricity in Rural Electrification Programs: Experie nce from Peru.” 14 With the exception of a temporary MS (Moderately Satisfactory) rating during the early stages of implementation (ISR No.2, 2012) due to delays in the replacement of a social specialist in the PU. 15 OP/BP 4.12 applied to 19 of the 31 investment sub-projects. 16 Paying more than 94% of the amount required at project closing. 17 Note that as per SAT guidance, given the complexities in achieving ROW payments in rural electrification projects, these are considered compliant if reaching 80 percent or above. Page 17 of 37 The World Bank Second Rural Electrification ( P117864 ) Environmental safeguards were implemented without any significant problems. Accordingly, the performance of the corresponding safeguards was rated satisfactory throughout the entire implementation period demonstrating that the lessons of the RE1 had been effectively incorporated into the Project’s procedures and practices. b. Financial Management and Audits. Overall, financial management arrangements were suitable. Centralization of project administration in the hands of qualified and experienced staff led to satisfactory financial management. The Project consistently provided timely and reliable financial information. External audits did not identify reportable conditions nor qualified opinions. Financial monitoring reports (IFRs) were delivered in timely fashion and recommendations were implemented on an ongoing basis. The review of SOEs confirmed that expenses were supported by adequate documentation and an appropriate approval process. In addition to its regular supervision missions, the Bank launched two missions to address specifically financial management issues during the most active period. c. Procurement. The DCF-DGER was responsible for procurement, in coordination with the EDCs in the case of rural electrification subprojects. The DCF-DGER was responsible for the procurement plan and supervising contracting processes. The EDCs were responsible for conducting the contracting processes18 for construction of subprojects, including preparing contracts and terms of reference, evaluating offers, and contract management. These responsibilities were handled in a satisfactory manner. Once the Project gained momentum, the procurement activities were implemented as planned. The performance of DCF-DGER and the distribution companies was in general satisfactory. C. BANK PERFORMANCE Quality at Entry Rating: Satisfactory • Project design involved a sound assessment and proposal of an approach that had been successful in a RE1, and was also consistent with the nature of the country’s rural development challenges. Project objectives remained highly relevant. • Lessons of RE1 were incorporated in the design of the Project. • Sound preparatory work, including the assessment of the project’s economic viability, safeguards assessment, confirmation of the executing agency’s implementing capacity and fiduciary arrangement, determined that the Project proceeded as designed, without any significant changes except for a minor re-allocation of resources among components. • The challenge of implementing the Project with a new government was complicated by an optimistic timetable that did not fully acknowledge the political uncertainty associated with a government transition. Quality of Supervision Rating: Satisfactory • The Bank actively supervised the Project, the frequency of missions was adequate and the Bank engaged effectively with new authorities and the EDCs from the early start, keeping the focus always on the Project’s achievement of its DO. • Major delays in Project start were not attributable to the Bank’s supervision, but to the political instability of the initial months of the administration (cabinet crisis), and the lower level of GoP support to the Project under the new administration in MEM. 18 The evaluation of bids was conducted by specially appointed committees comprising representatives of the corresponding distribution company and DCF-DGER. Page 18 of 37 The World Bank Second Rural Electrification ( P117864 ) • Performance reporting was objective, timely and consistent throughout the entire period. • Fiduciary and safeguards operated smoothly with the exception of right of way payments, an area that the Bank addressed continuously and allocated adequate resources to do so. • Project restructurings were appropriate in response to changing conditions (e.g. during the last months of implementation) and helped greatly in fully achieving PDOs. • The Bank’s dialogue with the Borrower and related agencies was constructive and useful in overcoming implementation obstacles. The Borrower took full ownership of the Project with one exception.19 Justification of Overall Rating of Bank Performance Considering the preparation and supervision ratings, an overall rating of Satisfactory is assigned. D. RISK TO DEVELOPMENT OUTCOME The Project’s DO was to increase access to electricity in rural areas of Peru on an efficient and sustainable basis. The benefits associated with the extension of the grid constitute the core of the Project’s development outcome, as this sub-component comprises about 67 percent of the new connections (with a potential to grow further in the short term) and more than 75 percent in terms of additional energy delivered and consumed. The grid extension subprojects use proven technologies and will be operated by the EDCs for their lifetime under the supervision of the regulator OSINERGMIN. EDCs have extensive experience in the technical and commercial operation of power grids and, thanks to more favorable conditions of the last regulatory period, their financial performance has improved considerably. It is expected that these subprojects will yield returns to allow distribution companies to keep them functioning satisfactorily during their expected lifetime. Therefore, the risks associated with the effective operation of the electricity grid are considered to be very low. There are risks of institutional and commercial nature that may apply to the PV off-grid subprojects and the promotion of productive uses, given their innovative nature.20 • The challenge of operating and maintaining PV systems in isolated areas still faces some uncertainties as the model being used has yet to be demonstrated in the long term. • The electrical equipment adopted in the productive uses component is in common use and, hence, interventions are considered highly sustainable. Documentation on the productive uses program has been shared with GIZ to facilitate such efforts in Peru and in other countries. With respect to future replication, DGER is working on a new phase that focuses on the wide dissemination of the experience gained with different productive chains through capacity building efforts. It would be important that DGER follows up, building from the Project experience, as much of the required methodology has been developed. V. LESSONS AND RECOMMENDATIONS Peru’s strong commitment to rural electrification, its well-functioning economy and electrical sector policies to support rural electrification provided a favorable environment for implementing the Project. Favorable sectoral policies included: (i) involving the electricity distribution companies and regional governments in subprojects; (ii) increasing affordability by including the connection fee in the capital cost rather than charging the user; (iii) cross-subsidizing small rural users while 19 The studies for small and medium hydropower projects have not been used by the intended client DGE. 20 The Systematic Operations Risk-rating Tool was utilized in the last five ISRs (staring with ISR9 in April 2015). Throughout this period, risk ratings varied from low-to-moderate. While the risks assessed focused more on the implementation period, it is worth noting that the risks on Institutional Capacity for Implementation and Sustainability were consistently rated as moderate. Page 19 of 37 The World Bank Second Rural Electrification ( P117864 ) maintaining cost reflective tariffs overall; (iv) using SHS to serve remote populations that cannot be reached economically from the grid; and (v) using low-cost technologies for grid extension (such as SWER). The innovative features of the model used in both Bank supported projects, together with the long-term nature of the RE effort, helped address the broad rural development objectives in Peru. The main innovative elements of the model are: (i) active involvement of EDS in formulating, implementing and partially financing grid extension and off-grid subprojects that contributes to sustainability of rural service; (ii) the provision of service by EDCs in remote areas using off- grid PV systems based on national regulated tariffs that contributes to the objective of inclusion of marginalized populations; (iii) the active promotion of productive uses of electricity by rural producers that helps to increase prosperity and financial sustainability of grid service in rural areas; and (iv) a technical assistance component that helped ensure the Project’s implementation and sustainability. Key conditions that contribute to the Project’s success and to the success of Peru’s RE efforts more generally are: (i) positive economic growth; (ii) well-functioning public sector EDCs; (iii) a regulatory environment that includes cost reflective tariffs; and (iv) the existence of a critical mass of customers to support cross- subsidies. Although the cross-subsidy element may be more suitable to middle-income economies, it is worth considering the model’s replicability in other countries and regions. The Government succeeded in raising rural electricity coverage from 30 percent in 2007 to 78 percent in 2015 including the contribution of the two RE Projects, but, as recognized in the PPAR of the RE1, the Government and EDCs need to enhance their cooperation to reach “the last mile” while ensuring sustainability. The Government has tested and adopted an innovative RE model. Going forward, the Government needs to maintain its political and budgetary support to the RE effort, monitor closely the need to revise the tariff regime, integrate projects into the country’s RE program, and provide adequate resources and adequate degree of autonomy to the project’s executing agencies. EDCs need to continue their financial contributions, strengthen their project preparation and contracting capability, provide better training of users on the maintenance of PV systems, and develop cost-effective ways to improve billing collection. The promotion of productive uses of electricity can be a highly beneficial component of a RE project. Ensuring its sustainability requires consistent and adequate levels of support. The benefits of promoting productive electricity uses to both individual producers and service providers have been measured in a socio-economic evaluation of RE1 and demonstrated under both RE projects. Peru’s experience confirms the importance of agents of change on the ground, such as NGOs, to assist producers to adopt electrical equipment, as EDCs cannot be expected to do the social development work of building the capacity of rural producers. However, as recognized in the PPAR, if the positive outcomes are to be sustained and expanded to new areas, then: (i) Government has to maintain its support for promoting productive uses, building on the Project’s experience; (ii) agents of change need to continue to work directly with individual producers; and (iii) EDCs have to maintain their leadership and proactive follow-up. The potential conflict between the long-term nature of Rural Electrification and short-term political objectives requires a sustained commitment and understanding of authorities to avoid problems in the programs’ design and implementation. Even in Peru’s highly supportive environment, the Project faced significant implementation problems. At mid-term, disbursements were extremely low. Problems were caused by: (i) a change in government that resulted in delays in appointing management teams of EDCs and a lack of commitment to the Project; (ii) the RE projects were under constant pressures from a larger public RE program that tended to prioritize short-term outcomes above sustainability objectives; and (iii) a GoP massive PV program crowded out the subsector and jeopardized the development objectives of the Project’s PV model. Addressing these issues requires the understanding and long-term commitment of the government, as well as building alliances with those interested in sustainable RE: local governments, distribution companies, and other local/regional stakeholders. The early involvement and empowerment of these stakeholders could be an effective way to achieve greater sustainability. While RE projects tend to imply a low social and environmental impact, right-of-way payments often face particular Page 20 of 37 The World Bank Second Rural Electrification ( P117864 ) difficulties and, hence, need to be addressed early and incorporated into the project’s i mplementation procedures, establishing clearly all steps and responsibilities. Common obstacles faced in the compliance of the ROW payments in rural areas include, inter alia, the absence or incomplete documentation of land titles, and difficulties in locating a dispersed number of owners. In the Project’s case, MEM issued early a set of guidelines that established clearly the procedure to be followed. These guidelines contributed to thorough work by EDCs on these issues and minimized complaints of affected people. The protocol developed to address this difficult issue has the potential to be replicated in other sector and countries; actions to disseminate this experience are already underway. Complementary Technical Assistance activities are often essential in addressing the last mile RE effort. It is important that the design of this component is tailored to the specific needs of the project and the country’s rural development effort, so as to maximize its effectiveness and ensure the ownership of the agencies involved. The Project’s TA activities were highly beneficial in both providing direct support to the Government and EDCs in the preparation and implementation RE sub-projects, as well as in the assessment of renewable energy resources, sub-transmission and distribution planning studies, promoting productive uses of electricity, assessing the impact of rural electrification and promoting energy efficiency and electrical safety among beneficiaries. Rural electrification projects are complex ventures implemented in remote areas and under difficult physical conditions that require a timely and effective coordination among a multiple number of parties. This challenge should not be underestimated. RE projects entail an unusual challenge: the joint effort and coordination of central and local governments, EDCs and other service providers, and local communities. However, there is a trend of optimistic planning in RE projects –usually caused by institutional factors (e.g. corporate goals, administrative inertia)– that is often characterized by short procurement and implementation timetables that contrast with the actual implementation records of rural .electrification projects in Latin America and other regions. Page 21 of 37 The World Bank Second Rural Electrification ( P117864 ) ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS A. RESULTS INDICATORS A.1 PDO Indicators Objective/Outcome: To increase access to electricity in rural areas of Peru on an efficient and sustainable basis. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion People provided with new or Number 0.00 140000.00 142895.00 improved electricity service 21-Mar-2011 21-Mar-2011 31-Aug-2017 People provided with access Number 0.00 0.00 95222.00 to electricity by hhold connections-Grid 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): Target surpassed by 2.1 percent. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of potential Number 0.00 42500.00 42669.00 connections 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): Target surpassed by 0.4 percent. Page 22 of 37 The World Bank Second Rural Electrification ( P117864 ) Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of new connections Number 0.00 34000.00 36518.00 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): Target surpassed by 7.4 percent. There is one grid-connected sub-project still ongoing that should be finished by March 2018. Once it is completed, it will add 818 connections to the actual 36,518 already completed, reaching a total of 37,336 connections (9.8 percent over the original target). Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of new renewable Number 0.00 0.00 11915.00 connections 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): While the PAD’s monitoring framework did not include a quantitative target for this indicator, the number of connections achieved exceeded by 68 percent the connections of the RE1, a highly satisfactory outcome considering the adverse circumstances faced during implementation. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of productive units Number 0.00 5000.00 4376.00 adopting electricity equipment 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): Although the number of productive units adopting electricity using equipment fell short of the target (5,000), Page 23 of 37 The World Bank Second Rural Electrification ( P117864 ) these units have been larger than expected, as the additional electricity consumption attributed to this equipment exceeded by 112 percent the intermediate results target. A.2 Intermediate Results Indicators Component: One: Rural Electrification Subprojects Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of subprojects Number 0.00 15.00 31.00 approved for financing 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): Target surpassed by 107 percent. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of distribution Number 0.00 8.00 8.00 companies that have made proposals to the project 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): Target fully met. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of renewable energy Number 0.00 8.00 7.00 Page 24 of 37 The World Bank Second Rural Electrification ( P117864 ) subprojects approved 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): Target met in 87.5 percent. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Amount of investment in Amount(USD) 0.00 10.40 6.38 electricity subprojects by distribution companies 21-Mar-2011 21-Mar-2011 31-Aug-2017 (excluding VAT) Comments (achievements against targets): Target met in 61.3 percent. It is noted that in spite of the lower level of investment of distribution companies, all physical targets were met at a lower cost. Component: Two: Technical Assistance for Rural Electrification Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of contracts for Number 0.00 3.00 3.00 productive uses in implementation or 21-Mar-2011 21-Mar-2011 31-Aug-2017 completed Comments (achievements against targets): Target fully met. Indicator Name Unit of Measure Baseline Original Target Formally Revised Actual Achieved at Page 25 of 37 The World Bank Second Rural Electrification ( P117864 ) Target Completion Additional electricity Megawatt 0.00 1500.00 3184.00 consumption in productive hour(MWh) uses 21-Mar-2011 21-Mar-2011 31-Aug-2017 Comments (achievements against targets): Target surpassed by 112 percent. Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Techno-economical and Number 0.00 20.00 21.00 social-environmental prefeasibbility studies 21-Mar-2011 21-Mar-2011 31-Aug-2017 completed for small hydro Comments (achievements against targets): Target surpassed by 5 percent. B. KEY OUTPUTS BY COMPONENT Objective/Outcome 1 To increase access to electricity in rural areas of Peru on an efficient and sustainable basis. 1. Infrastructure established with the capacity to provide service to rural households in the long term 2. Actual number of households and businesses connected during Outcome Indicators the Project 3. Number of households and businesses connected using individual solar photovoltaic systems Page 26 of 37 The World Bank Second Rural Electrification ( P117864 ) 4. Number of household productive units adopting electricity using equipment Component 1 1. Number of subprojects approved for financing 2. Number of distribution companies that have made proposals to the Project 3. Number of renewable energy subprojects approved 4. Amount of investment in electricity subprojects by distribution Intermediate Results Indicators companies (excluding VAT) Component 2 1. Number of contracts for productive uses in implementation or completed 2. Additional electricity consumption in productive uses 3. Techno-economic and social/environmental studies completed for small hydropower project Component 1 Infrastructure to provide electricity services to rural households, small enterprises and community facilities through: 1. grid-extension sub-projects, and 2. off-grid individual solar PV sub-projects Outputs were assessed against the first five indicators presented above. Key Outputs by Component Component 2 (linked to the achievement of the Objective/Outcome 1) 1. Productive uses of electricity. Outputs included three consultancy services to promote productive uses of electricity plus an international forum on the topic. 2. Seven consultancy services aimed at promoting renewable energy resources, encompassing the preparation of prefeasibility studies for 21 small to medium hydropower projects, including social and environmental aspects as well as the supervision of the studies. Page 27 of 37 The World Bank Second Rural Electrification ( P117864 ) Consultancy services included also the preparation of a plan to strengthen/adapt EDCs capacity to implement the country’s universal access and renewable energy policy, and study on the potential of hybrid generation options. 3. Fifteen consultancy services to assist distribution companies and other stakeholders in the preparation of rural PV sub-projects and in improving their capacity to develop and monitor rural grid extension projects. 4. Six consultancy services on regulatory, tariffs, financial and socio- economic issues, including two ex-post studies of the RE1 (socio- economic evaluation and impact of the promotion of productive uses of electricity), studies on a PPA model for rural PV systems, the quality of service of EDCs, development of a web platform for rural PV systems, and a base line for the Project. Page 28 of 37 The World Bank Second Rural Electrification ( P117864 ) ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION A. TASK TEAM MEMBERS Name Role Preparation Supervision/ICR Janina Andrea Franco Salazar Task Team Leader(s) Selene del Rocio La Vera Procurement Specialist(s) Juan Paulo Rivero Zanatta Financial Management Specialist Eduardo H. Zolezzi Team Member Victoria Susan Bogach Team Member Luis M. Vaca-Soto Team Member Raul Tolmos Environmental Safeguards Specialist Maria Virginia Hormazabal Team Member Catarina Isabel Portelo Counsel Fabio Pittaluga Social Safeguards Specialist Ines Perez Arroyo Team Member Andrea María Castro Astudillo Team Member Karen Bazex Team Member Maria Teresa Lasa Garcia Team Member Cesar Arreola Team Member Page 29 of 37 The World Bank Second Rural Electrification ( P117864 ) B. STAFF TIME AND COST Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY10 20.179 95,671.47 FY11 30.443 176,309.90 Total 50.62 271,981.37 Supervision/ICR FY11 2.335 12,530.36 FY12 15.037 109,602.09 FY13 13.845 102,005.49 FY14 20.339 152,389.06 FY15 18.655 157,847.78 FY16 14.003 153,559.22 FY17 26.441 161,558.06 FY18 11.249 81,656.65 Total 121.90 931,148.71 Page 30 of 37 The World Bank Second Rural Electrification ( P117864 ) ANNEX 3. PROJECT COST BY COMPONENT Amount at Approval Actual at Project Percentage of Approval Components (US$M) Closing (US$M) (US$M) Component 1. Rural 61.600 47.316 76.8 Electrification Subprojects Component 2: Technical Assistance (TA) for Rural 4.409 5.918 134.2 Electrification Component 3: Project 3.686 4.225 114.6 Management Total 69.695 57.459 82.4 Page 31 of 37 The World Bank Second Rural Electrification ( P117864 ) ANNEX 4. EFFICIENCY ANALYSIS Economic Analysis Following the Appraisal’s approach, the economic analysis focuses on the main component: investment in rural electrification sub-projects that encompassed grid extension and off-grid PV sub-components. This component accounted for 84 percent of the Project’s total cost. The economic internal rate of return (EIRR) of the rural electrification component is 18.3 percent and its net present value (NPV) US$24.3 million, based on a 10 percent discount rate that, as at appraisal, is considered to be the economic opportunity cost of capital in Peru. The EIRRs for the grid extension and off-grid PV sub-components are estimated to be 20.4 percent and 10.9 percent respectively. These results compare to an EIRR of 20.1 percent and 16.2 percent estimated at appraisal for the same components. The lower economic return (lower than the PAD’s) achieved by the off-grid component is attributed to a more conservative estimation of benefits. It should be noted, overall, the ex-post economic analysis is based on conservative estimates of the project’s economic performance, because the benefits of the productive uses component are partially incorporated (to the extent that households' electricity consumption capture some of the small enterprises supported by the project). - Grid extension sub-component Costs: The analysis includes the actual investment cost of US$35.6 million for 24,603 residential connections to the grid, including capital investment and connection costs, and excluding taxes and duties. It includes also annual O&M costs (3.3% of investment costs) plus the cost of energy that is estimated on the basis of a tariff of US$0.06 per kWh, that reflects supply costs (for generation and transmission). Benefits: New users replace kerosene lamps or alternative forms of lighting and other uses of energy by electricity and start to consume considerably more given the lower price of the new service. Surveys carried out among households recently connected to the grid by the Project indicate an average consumption of 22 kWh per month. Willingness to pay for electricity is reflected by the savings in traditional energy resources according to the following table. Consumption per month Willingness to Pay Final Survey (S./kWh) Household <15 kWh/m 4.27 Household > 15-30 kWh/m 1.57 Source: National Survey of Rural Household Energy Use The average WTP for the expected consumption level is estimated in US$1.33/kWh for 2017 values. Other assumptions are: • Installations have an economic life of 15 years. • Residential consumption of electricity will increase at an annual rate of 1.5 percent. • Exchange rate: Nuevo Sol 3.23 per US$ Page 32 of 37 The World Bank Second Rural Electrification ( P117864 ) Grid Extension Component – Cost and Benefits (thousand US$) Year HHs Capital Cost of O&M Total Total Net Connected Cost Energy Cost Benefits 1/ Benefits 0 24,603 35,615 0.0 0.0 35,615 0 -35,615 1 0 0.0 389.7 1,175 1,565 8,678 7,113 2 0 0.0 389.7 1,175 1,565 8,808 7,243 3 0 0.0 389.7 1,175 1,565 8,940 7,375 4 0 0.0 389.7 1,175 1,565 9,074 7,509 5 0 0.0 389.7 1,175 1,565 9,210 7,645 6 0 0.0 389.7 1,175 1,565 9,348 7,783 7 0 0.0 389.7 1,175 1,565 9,488 7,923 8 0 0.0 389.7 1,175 1,565 9,631 8,066 9 0 0.0 389.7 1,175 1,565 9,775 8,210 10 0 0.0 389.7 1,175 1,565 9,922 8,357 11 0 0.0 389.7 1,175 1,565 10,071 8,506 12 0 0.0 389.7 1,175 1,565 10,222 8,657 13 0 0.0 389.7 1,175 1,565 10,375 8,810 14 0 0.0 389.7 1,175 1,565 10,531 8,966 15 0 0.0 389.7 1,175 1,565 10,689 9,124 16 0 0.0 389.7 1,175 1,565 10,849 9,284 NPV: 23,669.3 IERR: 20.42% 1/ Based on WTP of $1.63 <15kWh/mo and $0.60 from 15-30kWh/mo - Photovoltaic sub-component. The economic internal rate of return for the residential solar component is 10.9 percent. These results are based on actual data for energy consumption per household of 9 kWh per month per household. Data and assumptions on costs and benefits are presented below. Costs: The analysis includes the actual investment cost of US$11.7 million for 11,915 Photovoltaic Home Systems installed by the project. It includes also a cost of US$131 per household per year for O&M costs plus the annualized cost of the replacement of batteries every five years, and an economic life of fifteen years. Benefits: SHS have two types of benefits: on one hand, they substitute the expense associated with traditional energy sources, i.e. lighting and communications devices, such as kerosene lamps, candles, gas and batteries, by solar panels whose running costs are practically negligible (replacement of parts and batteries are considered as maintenance costs and are taken into account in the analysis). In addition to the savings over traditional lighting and communications devices, PV systems make available more energy —and of better quality—and, therefore, they bring additional welfare benefits to the beneficiaries. Benefits are explained in the figure below that represents schematically the rural household demand for energy. When using traditional energy, users consume QK at price PK and the value of saved traditional energy resources is given by areas B+D. Once the consumer adopts a PV system, demand increases to QPV at price Page 33 of 37 The World Bank Second Rural Electrification ( P117864 ) PPV, and the additional benefits associated with the extra energy are given by areas C+E. A straight line approximation to the demand curve is used given the lack of quantifiable information regarding consumers’ preferences. The analysis considers the case of a typical household with the following characteristics based on the findings of surveys undertaken by the executing agency: QK: 107.5 kWh per year Pk: US$1.63 per kWh, based on surveys on households recently served by the Project; i.e. savings in traditional energy (B+D): US$ 175.2 per year. QPV: 216 kWh per year PPV: US$0.0 per kWh (i.e. running costs are only fixed maintenance costs, not a function of the consumption level). Accordingly, the overall annual benefits per household (savings in traditional energy plus the economic value of additional consumption), will be in the order of $260. This value is consistent with the findings of the most recent rural energy consumption surveys conducted in Peru. The table below presents the flow of costs and benefits for the project’s SHS component in thirteen provinces. Residential Photovoltaic Component – Cost and Benefits (thousand US$) Year HHs Capital O&M Total Avoided Additional Total Net Connected Cost Cost Cost Benefits 1/ Benefits Benefits 0 11,915 11,701 0 11,701 0 0 0 -11,701 1 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 2 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 3 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 4 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 5 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 6 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 7 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 8 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 Page 34 of 37 The World Bank Second Rural Electrification ( P117864 ) 9 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 10 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 11 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 12 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 13 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 14 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 15 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 16 0 0.0 1,560 1,560 2,088 1,053 3,141 1,581 NPV: 605.9 IERR: 10.95% 1/ WTP-Additional benefits associated to more and a better quality of energy source Financial Viability The design of the RE subprojects aimed to ensure efficiency. To this end, each subproject was subject to a financial scrutiny that followed the process used by the RE1 Project, to evaluate its cash flow and calculate the amount of subsidy required for the distribution company to achieve a 12 percent FRR on its part of the investment. That is, the selection and approval of subprojects required that each one be financially viable, taking into account the capital cost subsidy approved by the MEF. A sample of 23 grid extension subprojects, plus a typical PV solar home system, were analyzed at appraisal with view to confirm their financial viability at an acceptable level of capital cost subsidy of 90% or less. The subproject’s financial viability should be confirmed in practice, as the actual average distribution company investment for grid extension projects was 14.3 percent, ranging from 11.5 to 19.8 percent. Also, the implementation of PV subprojects was, on average, slightly below the estimated cost. Hence, the 90% capital cost subsidy (i.e. a fixed 10% investment of the distribution company) foreseen at appraisal is expected to guarantee their financial viability. Page 35 of 37 The World Bank Second Rural Electrification ( P117864 ) ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS DCF-DGER has prepared a thorough Completion Report (Informe de Cierre, Agosto 2017) that addressed the Project’s background, budgetary execution, scope and results, as well as lessons learned and conclusions. The report’s quantitative conclusions coincide with the ICR’s. The report’s lessons are summarized below. Grid-Extension; • The Project model has proven to be an adequate mechanism to allow EDC’s active participation –and complementing their efforts– in extending electricity coverage. To this end, EDCs received technical support to strengthen their professional’s capacity in project formulation and supervision. • Furthermore, legal amendments that establish EDC’s responsibility in planning and developing rural electrification projects have broadened the adoption of the Project’s model. • In order to ensure the sustainability of the grid extension effort is it necessary to strengthen the existing grids to improve the quality of service and be able to respond efficiently to further demand growth. • The Project had a positive impact on the customers’ welfare. Market studies indicate an improvement in households’ income, particularly associated with labor/employment. • The rural electricity market is characterized by a low level of consumption that jeopardizes long term sustainability, and the quality of the service itself. The promotion of productive uses of electricity is a proven strategy to increase demand and, thus, should be incorporated into the Government’s sector policy, mainstreaming and scaling-up productive uses, and drawing the lessons of the two Rural Electrification Projects. Accordingly, DGER is incorporating the Project’s experience into its capacity building efforts. • Incorporating the promotion of productive uses of electricity into a broader rural development intervention (including water supply and sewage, health, education and communications, among others) will help in ensuring the sustainability of RE. • It is proposed that the methodology developed for the promotion of productive uses should be implemented by the DGER, in coordination with EDCs and regional governments, within a sector policy subject to performance indicators. • The RE process should incorporate: 1. Capacity building in the rational use of electricity, safety and potential uses of energy; 2. Following the PV experience, install basic interior electrical fittings (for 3 lights, 5 sockets, cables and protection system) to guarantee its optimal and safe use. PV solar home systems; • Solar Home Systems have succeeded in providing an electricity service to remote and disperse rural populations, covering basic needs such lighting, small electrical appliances, charging cell phones. • Ensuring sustainability of PV solar home systems requires: 1) Continuous training and familiarization processes of customers, an activity that should involve distribution companies to facilitate customer access to electric appliances adapted to the energy service; and 2) Reducing costs (and improving operational reliability) of commercial and O&M processes by incorporating information technology and the training of local operators. • The eventual relocation of PV systems –upon the arrival of the grid to an area served by PV systems– should be part of an orderly RE program. Page 36 of 37 The World Bank Second Rural Electrification ( P117864 ) ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) Apoyo Consultoría-AC Pública. Servicio de Consultoría para establecer la Línea de Base del Programa FONER II. Cuarto Informe, preparado para DGER. Feb. 2017. Consorcio Macroconsult S.A.-Instituto Cuanto. Evaluación Socio-Económica de Sub-proyectos de Electrificación Rural. Informe presentado al Proyecto FONER II. Ago. 2016. Consorcio Prisma-Instituto Cuanto-Macroconsult S.A. Evaluación de Resultados e Impacto del Componente 3 Promoción de Usos Productivos de la Electricidad. Informe presentado al Proyecto FONER II. 2016. FONAFE y Cenergía, 2016. Evaluación de la Electrificación Rural en el Empresa de Administración de Infraestructura Eléctrica S.A. Adinelsa y en Electrocentro-Distriluz. Informes 1 a 5. IEG/World Bank Group, Project Performance Assessment Report. Peru: Rural Electrification Project (IBRD Loan 7366-PE) (Global Environment Facility Trust Fund Grant 056023-PE). June 2017. Loan Agreement (Second Rural Electrification Project) between Republic of Peru and International Bank for Reconstruction and Development. July 5, 2011. MEM Guía de Procedimientos de Cierre de la Gestión de Servidumbre y Reasentamientos Involuntarios OP 4.12. Junio 2012. MEM Mejoramiento de la Electrificación Rural Mediante la Aplicación de Fondos Concursables – FONER II. Estudio de Preinversión a nivel de Perfil, 2011. MEM Testimonios de productores sobre aplicación del Uso Productivo de Elecricidad. Proyecto FONER-DGER-MINEM, 2016. MEM FONER II, Logros Obtenidos y Lecciones Aprendidas, Informe de Cierre. Agosto 2017. World Bank Aide Memoire for the Project’s Supervision Missions, 2011-2017. World Bank Project Implementation Status Reports (ISRs), 2011-2017. World Bank Country Partnership Strategy for the Republic of Peru for the period FY12-FY16. World Bank Project Appraisal Document on a Proposed Loan in the Amount of US$50 Million to the Republic of Peru for a Second Rural Electrification Project, 2011. World Bank Country Partnership Strategy for the Republic of Peru for the period FY07-FY11 (Report No. 37913-PE). World Bank Project Restructuring documentation issued from July 2011 to August 2017. World Bank Peru: National Survey of Rural Household Energy Use. 2010. World Bank Promoting Productive Uses of Electricity in Rural Electrification Programs: Experience from Peru Page 37 of 37