Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB1004 Project Name Second Southern Provincial Rural Electri Region EAST ASIA AND PACIFIC Sector Power (90%);General public administration sector (10%) Project ID P075531 GEF Focal Area M-Multi-focal area Global Supplemental ID P080054 Borrower(s) GOVERMENT OF LAO PDR (GOL) Implementing Agency Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [ ] S 2 [ ] S 3 [ ] S F [ ] TBD (to be determined) Date PID Prepared June 30, 2004 Date of Appraisal Authorization June 30, 2004 Date of Board Approval October 19, 2004 1. Country and Sector Background Lao PDR is classified as a Least Developed Country (LDC) with an estimated per capita income of US$320 in 2003. This situation ranks the country among the poorest in the East Asia region, leaving approximately 29% of the population below the national poverty line of $1.5 a day (in 2002/03). Progress Towards Rural Development and Poverty Reduction Since the early 1990s, the Government of Lao PDR (GoL) has been successful in achieving solid growth rates and significant reduction in poverty levels but the trend has weakened somewhat in the late 1990s. In an attempt to reinvigorate socio-economic development, GoL has prepared the National Growth and Poverty Eradication Strategy (NGPES), which was approved by the National Assembly in January, 2004. The NGPES defines a national development vision comprising three central elements: (i) enabling environment for growth and development; (ii) enhanced governance; and (iii) poverty reduction. The energy sector is identified as one of the strategic growth sectors in the NGPES, includes both rural electrification and reinforcement of the electricity network with a view to power generation for exports. In response to the need for a clear sector policy and strategy, the Ministry of Industry and Handicraft (MIH) issued in 2001 a Power Sector Policy Statement followed up by a stakeholder workshop and action plan for implementation. The action plan identified three key impact areas: (i) expanding rural electrification; (ii) completing commercialization of Electricité du Laos (EdL); and (iii) defining a strategy for financing sector development. Rural Electrification and Power Sector Issues Page 2 Rural electrification marks one of the remarkable achievements in the socio-economic development of Lao PDR with the connection rate increasing from approximately 120,000 households in 1995 to 370,000 (representing -- % of all households) by the end of 2003. EdL’s planning and implementation capacities have markedly improved through implementation of five projects funded by the IDA and the Asian Development Bank (ADB). However, as electrification moves to increasingly remote areas, grid connection becomes less viable. In response, GoL has promoted off-grid delivery models, favoring renewable technologies. EdL was corporatized in 1997 but remains wholly-owned by GoL. While cost/profit centers within EdL have been established, financial relations between EdL and GoL are still intertwined. EdL’s financial viability relies to some extent on hydropower export revenues, a high level of Government equity, and from finance on concessional terms from some agencies. While there is rationale for some level of Government subsidy to EdL’s extensive rural electrification program, a rational basis for determining EdL’s tariff and government subsidies towards rural electrification has yet to be defined. EdL’s finances were strongly impacted by the dramatic currency devaluations brought on by the East Asia financial crisis. Significant improvements resulted from a Financial Recovery Plan (FRP) which brought the utility in line with financial covenants in 2002, however, continued improvements in planning, financing strategy and operations are required to maintain the good performance. Loss reduction is one area where improvements have been recorded but with 16% transmission and distribution losses, there is further scope for financial gains. Also, headquarters and branch operations need to be integrated through further development of information technology and communications systems. GoL plans an ambitious pace of power sector expansion with a n overall goal of connecting 90% of households by 2020 with intermediate targets of --% by 2010 and ---households by 2015, while also promoting hydropower export facilities. It is clear that these ambitious objectives will require financing from sources other than the traditional concessionary lenders. New financing models to take optimum advantage of non-traditional public and private financiers need to be identified and associated revisions to the regulatory framework adopted. Barriers to achieving Global Environment Objectives Other than large hydropower projects such as Nam Neung and the proposed Nam Theun 2, renewable energy development is still in its infancy in Lao PDR. The off-grid model currently being undertaken by the GoL’s Ministry of Industry and Handicrafts (MIH) is still in its infancy and up until now lacks a firm regulatory and sustainability foundation, and technology and planning basis. Similarly, DSM and energy efficiency have not yet come under serious consideration by either government or consumers. Key barriers to creating conditions supportive of increased use of renewables include: · Insufficient rural electrification planning capacity to prepare large-scale, integrated rural electrification projects (with both on- and off-grid components) that will deliver household access most cost-effectively. · Insufficient availability of concessionary financing in amounts large enough to maintain the planned pace of electrification. Page 3 · Excessively low tariffs currently charged to rural households, which, coupled with their relatively low electricity consumption, means that rural electricity services do not cover costs and are a drain on the financial viability of EdL. · Absence of integrated rural development planning, with the result that income-generating electricity uses needed to make power supply economically viable are slow to develop. · Lack of private sector capacity for scaling-up implementation of rural electrification. The barriers to development of demand side management (DSM) and energy efficiency in Lao PDR are even more basic: · Lack of any information about electricity consumption patterns by rate class or end-use · Lack of public or private sector capacity for program planning and implementation · Lack of technical expertise or awareness by end-use customers as regards energy efficiency technologies and practices. · Low level of understanding of the benefits of energy efficiency relative to current and future electricity costs. Policy Fit with Lao PDR Climate Change Strategy The GoL’s climate change strategy is the responsibility of the Science Technology and Environment Agency (STEA) located within the Office of the Prime Minister. This is also the location of the GEF National Focal Point for Lao PDR. The climate change issues of greatest concern to STEA include consumption of fossil fuels, especially diesel oil, by the industry, transport and agriculture sectors; methane emissions from paddy fields, as well as use of fuel wood and charcoal, in the agricultural/rural sector; and reforestation and grasslands conservation issues. SPRE II is a close policy fit with the Lao PDR climate change strategy, which includes the following priority policy objectives: · Energy conservation and improvements in energy efficiency through upgrading of currently employed technologies · Introduction of advanced technologies that are more efficient or based on renewable energy sources · Promotion of the use of renewable energy such as small-scale hydropower development and electricity generation by wind, solar, thermal energy and biogas. 1 The GoL GEF Focal Point endorsed the proposed GEF financing of SPRE II in a letter to the Country Manager dated 3 March 2004. 2. Objectives 1 Climate Change Issues and Policies in Lao PDR, Syamphone Sengchandala, Climate Change Manager, STEA. Training Workshop on Climate Change Issues in Mekong Region, December 2002. Page 4 1. Project Development Objective The project development objective is to improve incomes and living standards of 123,500 rural households through electrification of these households. Achievement of the project objective will be measured by socio-economic surveys in villages electrified under the project, the results of which will be compared with the baseline studies referred to above. There are two expected outcomes for the global environmental objective: (1) substantial adoption of renewable energy in GoL’s rural electrification program (growing from a 7-10% share of all newly electrified households in SPRE to a 20% share in SPRE II); and (2) increased efficiency of energy consumption for EdL customers, that in turn will result in increased exports of hydropower production to Thailand and eventual greenhouse gas savings, as thermal power plants are the marginal production unit in Thailand over the project period. As described in Annex 3, achievement of the renewable energy objective will be measured by the percentage of households electrified by renewable off-grid technologies in relation to overall households in the proposed project, in comparison to the baseline established by the SPRE project. For the DSM and energy efficiency activities, a detailed M&E program will be formulated to estimate the domestic electricity usage and cost savings, increased power exports, and regional carbon reductions that comprise the benefits of the off-grid and DSM/energy efficiency components of SPRE II. NGPES and CAS Objectives. In line with the main objective of the government-owned NGPES and the existing CAS, the proposed project will support rural and national infrastructure development by targeting rural electricity consumers and sector-wide institution building. In this way, the project will respond to the NGPES objectives of poverty reduction and establishment of an enabling environment for growth and development while supporting the CAS objective of rural and national infrastructure development. Global Environmental Objective. The GEF financed activities will contribute to two GEF climate change operational program objectives – (i) removing the barriers to higher efficiency levels in urban and rural power end-use consumption (OP 5); and (ii) wider use of renewable energy technologies in rural power supply, especially off-grid (OP 6). Furthermore, the strategies and outcomes that the proposed GEF financing will support are closely aligned with four of the six recently-adopted Strategic Priorities for the Climate Change Focal Area, especially creation of power sector policy frameworks supportive of renewable energy and energy efficiency (CC- 3). The global benefits of the two GEF-supported SPRE II components are estimated as 4,150 te CO 2 lifetime for the off-grid renewable electrification component and 44,500 te CO 2 lifetime for the DSM and energy efficiency component. 3. Rationale for Bank Involvement Page 5 Rural electrification is an explicit component of the NGPES, and an area where GoL has achieved substantial success over the last decade, and where IDA has made a substantial contribution having financed 25-35% of national connections. GEF has made substantial contribution to the off-grid component of this electrification effort, having supported implementation activities totaling some 5,000 households to date. While GOL has been successful in mobilizing funding for transmission and generation development from other (bilateral and private) sources, rural electrification has not yet attracted funding beyond ADB and the IDA. The concessional terms of IDA and ADB funding are appropriate to rural electrification where some level of capital subsidy is deemed to be appropriate if social objectives of providing electricity to the poorest consumers are to be realized. However, it is considered that there is scope for attracting additional funding to rural electrification activities if appropriate arrangements are devised to meld grant or concessionary funding from public sources with private funding seeking a commercial rate of return. To this end, the proposed project provides for the establishment of a Rural Electrification Fund and associated regulatory arrangements to promote non-utility electrification and to attract financing from non-traditional sources. The proposed arrangements involve a transition from those developed under the existing off-grid pilot project with IDA and GEF support. Need for GEF Involvement. The proposed GEF financing for SPRE II will be a follow on to the invaluable support already provided to off-grid electrification in Lao PDR by a GEF component of SPRE. This predecessor Medium-Sized Project (MSP) provided $750,000 of technical assistance and capacity building necessary to develop the organizational, institutional, financial, and technical elements of the off-grid component of SPRE. A co-financing model similar to SPRE is proposed for SPRE II. IDA will provide the concessional financing appropriate to rural electrification, while GEF will provide continued grant financing of technical assistance activities central to both successful physical implementation of Phase 1 and preparing a more sustainable and econ omical approach to meeting the GOL’s long-term goals for electrification. As with SPRE, the GEF will support activities including organizational development, capacity building, and creation of institutional arrangements that are designed to overcome the barriers to meeting global environmental objectives in tandem with meeting project objectives. These are generally activities which are outside the narrow scope of the physical electrification project but are nevertheless vital to securing the goals of maximum participation by renewable energy and energy efficiency in the development of the Lao power sector. Commercialization of EdL . IDA has closely collaborated with ADB in working to increase the commercialization of EdL. While the FRP will achieve overall tariff levels in the order of those required for financial sustainability, an appropriate tariff structure and tariff arrangements that will clearly separate EdL’s commercial objectives from GoL’s social objectives have yet to be defined. Work has commenced in defining such a structure using PHRD funds, and is expected to result in an action plan for tariff reform to be fully implemented within the program period. The broader issues of power sector restructuring will be initially addressed by an ADB financed study under its -----project, while the Government has requested the Bank to seek PPIAF funding for a workshop to introduce the principles and options for independent regulation of the sector. Page 6 Financing Strategy . It is an explicit goal of GoL to attract private financing to complement public funding of sector expansion, and in recognition of the demanding requirements of private investors, IDA has engaged in improvements of the enabling framework of the sector. GoL also recognizes that attraction of private investment will require the adoption of new development models involving various forms of public private partnership, preparation and continuous review of least-cost planning scenarios, and upstream development work associated with favored expansion candidate projects. Studies in this regard have been initiated during the preparation of the current project. Development of a sector financing strategy and implementation of this strategy will be continued under the current project. IDA’s ability to play a leadership role in these sector reform activities are its primary “value added” beyond the provision of concessionary finance which could also be productively utilized in other sectors. The ability to play this role also relies on the relationship between IDA and GoL/EdL that has grown up over more than a decade’s involvement in the sector, through which the counterparts regard IDA as a trusted partner in pursuing sector reform consistent with the context and pace of national reform efforts. 4. Description The Project has two components one to be executed by each beneficiary EdL and MIH. The EdL component will contribute to the achievement of project objectives through electrification of rural households by grid extension, and indirectly through further advancing the commercialization of EdL, thus increasing EdL’s self-financing capability. It consists of the following sub-components: (a) extension of the EdL grid to about 42,000 households in some 544 villages in seven central and southern provinces; (b) enhancement of existing EdL loss reduction efforts (covering both technical and non technical losses) through implementation of a program of activities and investments developed and piloted under a PHRD financed study; (c) furthering integration of EdL headquarters and branch offices (BO) through rolling out the existing billing and accounting system (BAS) installed in Vientiane Office and some BOs to remaining BOs; (d) implementing a program of Demand-Side Management (DSM) and energy efficiency activities in the country, including establishment of provisional institutional arrangements for DSM planning and energy efficiency policy development within EdL or MIH or both (further definition of this program currently underway with ASTAE assistance). (e) development of tariff and subsidy policies and associated tariff regime and an action plan to implement this regime. The EdL component will generally be IDA financed, except that DSM and energy efficiency activities will be financed by GEF. In all activities, EdL will provide substantial co-financing. Page 7 The MIH component will contribute to the project development objective through scaling up the pilot off-grid program of rural electrification. It will also establish the enabling environment (together with the EdL tariff/subsidy studies) to encourage other participants to develop and finance power sector expansion under the Phase II project. It consists of the following sub- components: (a) provide electrification to about 10,000 households spread over 1109 villages in 17 provinces through off-grid technologies (mostly renewables); (b) scaling up the existing MIH off-grid development program through establishment of necessary legal and regulatory underpinnings, strengthening organization and management arrangements, offering a wider range of off-grid technologies, and conversion of the existing re-flow account into a Rural Electrification Fund (REF) to provide a self-financing contribution to the MIH program. (c) detailed design of other rural electrification models involving non-traditional developers and financiers and development and enactment of necessary legal and regulatory arrangements including those necessary to extend REF to other participants, and project preparation including solicitation documents for “other model” projects. (d) development of a rural electrification master-plan (including associated resource studies for distributed generation) and an electricity distribution database; (e) development of a sector financing strategy including models for solicitation for new generation and preparation of a small hydropower IPP project for sales to the EdL grid (policy, legal, regulatory, solicitation documents), assuming technical feasibility study carried out by JICA. (f) strengthening organizational and management arrangements within MIH to enable it to undertake its expanded roles in the areas of regulation and planning. 5. Financing Source: ($m.) BORROWER/RECIPIENT 8.08 INTERNATIONAL DEVELOPMENT ASSOCIATION 20 GLOBAL ENVIRONMENT FACILITY 3.75* BORROWING AGENCY LOCAL COMMUNITIES 4.35 Total 36.18 * $ 5 million for both phases. 6. Implementation Besides GEF and PHRD, the project benefits from extensive coordination with other donor agencies. Firstly, Asian Development Bank (ADB) and the bank group have close cooperation in Laos. The proposed project follows previous agreements with the ADB on geographical division of project areas in order to avoid duplication and competition of activities (the ADB is engaged in the ten northern provinces of the country). ADB and IDA also cooperate on loan covenants and worked closely with the bank on preparation and implementation of financial Page 8 recovery plan (FRP) for EdL. They were an active participant in the strategy workshop and are financing sector reform activities that complement those being financed by ida. JICA have financed several studies in Lao PDR, the most relevant to the current project being the development of transmission and distribution master plan, and ongoing feasibility studies for hydropower based mini-grids which might form the basis for new electrification models proposed to be piloted in the phase 2 project. China and India are financing local hydropower developments and transmission lines, the latter providing the basis for some rural electrification included in the current project. PPIAF funded the activities associated with the implementation strategy workshop. ESMAP financed a 1999 study “institutional development for off-grid electrification” which provided the starting point for proposed studies under the project. ASTAE provided considerable assistance in project definition and in bank supervision of PHRD financed studies. consultations have also occurred with the emerging private sector off-grid service companies, such as diamond electrical and sunlabob. the effort to create a rural electrification master plan, including a rural electrification data base comprising socioeconomic as well as resource information, will require close collaboration with other project-implementing agencies, notably JICA ’s master plan study on small hydropower in northern Laos. 2. Institutional and implementation arrangements Implementation period. The Project will be implemented over a 2.5 year period implemented from beginning 2005 to middle 2007. This Project comprises Phase 1 of an Adjustable Program Loan (APL) as described in B (1) above. Implementing agencies. The Project will be implemented by EdL and MIH jointly. EdL will be responsible for the EdL component as defined in Section above. The project organization is generally divided into two functions, i.e. project office in headquarters and construction team at each of the five BOs. The project office will be responsible for overall management and control of the project execution and to maintain close coordination with the IDA, while the BOs will be responsible for implementation of individual physical sub-projects in the seven southern provinces. MIH will be responsible for the implementation of the MIH component as defined in section --- above, including the off-grid investment component. During the first 6-12 months of project there will be an intensive institutional strengthening effort expended on the management of the off-grid component. The thrust of the institutional strengthening activity will be a comprehensive program of management outsourcing, based on the recommendations of the Interim Evaluation of the Off-Grid Component, and discussions during previous missions, as well as the Draft Decree on the Rural Electrification Fund. PHRD and ASTAE funds have already been directed towards development of Terms of Reference (TORs) and a procurement strategy for outside contracting of most off-grid implementation functions currently performed by the OPS. This includes central procurement, establishment and capacity building of ESCOs, provision of marketing materials, village marketing, planning, and preparation procedures, and provision of technical support. The outsourcing process will systematically address the current short-comings Page 9 of MIH’s OPS as described above by establishing necessary functional capacity, strengthening organization and management arrangements, providing for a wider range of off-grid technologies, and conversion of the existing purchaser repayment account into a Rural Electrification Fund (REF) that can potentially lead to a self-financing off-grid operation. The current arrangement will be maintained until the outsourcing process is complete.. After the transition, MIH will oversee the off-grid program while continuing to implement activities associated with MIH under the sector reform and DSM components. Capacity constraints . Procurement Capacity Constraints: While EdL has acquired practical procurement experience through the pervious IDA financed projects, it would still need external assistance in finalizing technical specifications and preparing bidding documents up to a good standard. As such, an international consulting firm has been selected to assist EdL in all aspects of project preparation and implementation including procurement and subsequent contract management. On the MIH side, it has done reasonably well in handling the consultant selection process (QCBS) for three preparation studies funded by PHRD grant. However, it has no ICB experience. As such, an individual procurement consultant (who knows the IDA procurement guidelines and procedures) will be hired to provide training to MIH staff on ICB procedures and assistance in preparation of ICB bidding documents. Financial management capacity constraints: Financial management of the project would be separately handled by EdL and MIH. While EdL is familiar with the IDA financial management and disbursement procedures through implementation of the previous IDA funded projects, it would still need some trainings on preparation of Financial Monitoring Reports (FMRs) required by the proposed project. In addition, (i) the bookkeeping of the existing SPRE project, carried out in Excel spread sheet, would be automated by using the newly installed financial accounting system by EdL--BAS; (ii) technical assistance will be provided to the Internal Audit Department to enhance their capacities. On the MIH side, even though it is not responsible for bookkeeping of the existing SPRE project, but the financial transactions have been kept track for its internal monitoring purpose by using in-house developed accounting program. With minor modification needed, the program should better serve the requirements of the SPRE II project. In addition, considerable training will be provided to MIH staff on IDA financial management and disbursement procedures. Funds Flow. IDA funds would be made available to Government at standard terms. The Government would on lend the Credit proceeds for the EdL component to EdL under a Subsidiary Loan Agreement. Credit/Grant proceeds will be channeled either through Special Accounts to EdL and MIH or through direct payment. EdL counterpart funds will be channeled through normal EdL payment procedures. Government counterpart funds are expected to be mobilized from the re-flows associated with ongoing rural electrification activities. These currently flow into a locked account, but under the project this is expected to be converted to an REF with the ability to co- Page 10 finance IDA investments. Disbursement from the IDA and GEF Credit and Grant would be made on the traditional system. 7. Sustainability Sustainability of the off-grid component. Certain risks to the sustainability of the off-grid component were identified in the Evaluation of Off-Grid Renewable Energy Electrification Pilot Demonstration Project . Key concerns were: (1) the risk of a collapse of the enabling environment set up for a nascent off-grid private sector, with a resulting loss of confidence by existing and prospective customers, resulting from gaps in funding; (2) incapacity of a government-housed off-grid operation to accommodate implementation of a diverse portfolio of renewable energy technologies; (3) absence of integrated rural development planning, with the result that income-generating electricity uses needed to make power supply economically viable are slow to develop; (4) Lack of sufficient capacity for the physical planning process, including integration of grid extension with off-grid and mini-/district grids necessary for optimal scaling- up of rural electrification; (5) insufficient funds flow to maintain the focus of key actors (users, village technicians, village committees, provincial and national companies, provincial and central government officials) on maintaining equipment and servicing customers; (6) long repayment periods and likelihood of under-funding for intermittent reinvestment in batteries and spare parts. There are no universal solutions to the sources of sustainability problems listed above. However, the current project design has included important features that have proven effective in combating sustainability problems in other countries. Off-grid design features already in place that are conducive to sustainability include: (1) A robust financing system, which during SPRE had achieved a 97% repayment rate from customers. The system underpins sustainability by assuring that villagers, village technicians and managers, village oversight committees, and provincial companies, all have a financial incentive to keep all the equipment working and the payments flowing each month; 2 and (2) Progressive increase in private investment. Under the off-grid component of SPRE, off-grid subscribers already significantly self-finance the electricity access (calculated as between 60% and 80% of hardware cost, delivery and 10-year support costs). The Electrification Service Companies (ESCOs) and Village Electricity Managers (VEMs) provide their own working capital, which is repaid through their share of the reflow payments. Additional design features supportive of sustainability will be provided by the GEF-financed technical assistance to SPRE II off-grid component, including: · Establishment of a permanent facility, in the form of a Rural Energy Fund, for financing rural electrification in Laos. This will mitigate the funding gaps that result when all rural electrification financing is project-based; · Comprehensive outsourcing of critical off-grid functions, inclusive of incentives that will stimulate greater technology diversity in provincial-level ESCO operations; 2 The reflow account, expected to be the underpinning of an eventual Rural Energy Fund, had a balance of 67,000 USD by the end of 2003. It is possible to anticipate the eventual removal of GEF grant financing, with progressive replacement for certain types of expenditure from the reflow account, within the scope of this project. Page 11 · Technical assistance to key processes critical to sustainable electrification – an optimized physical planning process, and integration of grid- and off-grid electrification with other rural development efforts. · Establishment of a regulatory framework that will install MIH in its appropriate role as regulator of the overall electrification process, including ensuring that individual ESCOs operate in ways that support long-term reliability of electrification schemes, including provision for reinvestment in spare parts and maintenance as necessary for reliable operation. Sustainabilty of the DSM and Energy Efficiency Component. DSM and energy efficiency are mostly unknown at present, and significant and rudimentary effort is needed just to characterize the potential impacts and economics of such a program. For this Project the most basic design element conducive to sustainability will be the creation and organizational development of a DSM cell within EdL (and possibly a sister operation in MIH). This DSM cell will be charged with the basic planning and potential studies necessary to give a broad outline of the possible DSM and energy efficiency strategies and programs suitable to the Lao energy and power sectors. Replicability of the Off-Grid Component. The project design put forward here is already an amalgam of several other projects, including the immediate predecessor SPRE project, the Cambodia Rural Transmission and Distribution Project, and other recent rural electrification efforts in Chile and elsewhere. Successful continued innovation of the basic framework for an off-grid component undertaken in the context of a national program of grid and off-grid access provision where renewable energy plays a critical role and financing is undertaken both through concessional financing and other sources coordinated by a national Electrification Fund will likely follow throughout the East Asia and adjacent regions. Other countries which would likely benefit from variants of this model include Nepal, Bangladesh, Papua New Guinea, Myanmar and others. Replicability of the DSM and Energy Efficiency Component. The proposed DSM project is currently anticipated to be a direct replication of earlier efforts, financed by GEF, in Thailand and Vietnam. Successful step-wise development of DSM and energy efficiency in Lao PDR via basic data collection followed by potential assessment, strategy development, indicative pilot projects, and program roll-out could easily be replicated in other high-growth, low per-capita electricity use countries including Cambodia, Nepal and Myanmar. 8. Lessons Learned from Past Operations in the Country/Sector The project takes into account IDA wide lessons of rural electrification including those from the following sources: Rural Electrification: A Hard Look at Costs and Benefits; OED Precis, May 1995 and . Project team members and peer reviewers also bring lessons from other IDA projects and studies in Bangladesh, India, Sri Lanka, Philippines, Vietnam and Cambodia. IDA has had four rural electrification projects in Lao PDR, of which the most recent (Southern Provinces Rural Electrification (SPRE) Credit # 30470) is nearing completion. Key lessons Page 12 learned from the grid extension program include the high elasticity of connection rates to upfront house-wiring costs; choices in relation to connection capacity help to deal with the affordability issue; large cost savings are achievable through optimization of grid-extension designs and that loss reduction investments are very cost effective. A formal interim evaluation of the GEF MSP supported off-grid program concluded that constraints associated with the off-grid project management unit being a government office led to delays in its operations and difficulties in performing its work. The evaluation recommended that the management of an expanded off-grid program undertaken under the SPRE II program be transitioned to a private or joint venture company, allowing for more efficient operations and increased flexibility in design, a greater focus and transparency in its work and stronger incentives through the linking of payments to the company to its performance. Any outsourcing or management contracting solution would need to transfer the authority to take procurement and other decisions, where delays currently often occur, while be accountable to MIH regulation and IDA oversight. These recommendations have become a central element of the SPRE II design, which will emphasize outsourcing of off-grid planning and implementation functions and development of alternative delivery mechanisms, among other institutional innovations. The project design also reflects lessons learned from other recent and ongoing GEF co-financed projects, notably Cambodia, Chile, Swaziland and Ethiopia, each of which include rural energy funds and similar institutional arrangements in support of long-term electrification programs. Key lessons from these operations reflected in the design of the off-grid component of SPRE II include: · To ensure institutional and financial sustainability, rural energy programs must maximize private sector participation · To develop viable small- and medium-size rural energy entrepreneurs, it is critical to provide early hand-holding enterprise development services combined with modest amounts of start-up financing. · To achieve desired impacts on living standards, it is critical to take an integrated approach that links RE services with livelihood support and income generating activities. · The most critical role for governments is to put in place a sound regulatory framework, an adequate tariff structure, and a dedicated rural electrification agency that can look after mobilization of concessional financing · Rural electrification programs should be an integral part of the power sector. 3 The current design most closely resembles a parallel operation in Cambodia, which involves a Rural Energy Fund that is being established specifically to enable attainment of a long-range electrification program through four categories of activities: coordination and dissemination of information, technical assistance to improve supply side options, grants to co-finance project preparation, and grants to co-finance project investment. The REF will comprise a Secretariat including information, planning and evaluation, finance, and administration functions and will be governed by both a Rural Electrification Board with government, donor and financial sector 3 A Review of the ESMAP Rural Energy and Renewable Energy Portfolio, April 2004.Joint UNDP/ESMAP Publication. Page 13 participation and will report to both the Ministers for Energy and Finance. The REF will assist private sector developers in providing new connections, electricity to households using solar home systems, and add as well mini-hydro, and micro hydro capacity. 4 Project design has also greatly benefited from the results of Japanese PHRD financed studies on five topics carried out during project preparation stage: (a) a social-economic survey of electrified and non-electrified villages and households in areas served by earlier IDA supported projects as well as proposed project areas including the design and initial population of a rural electrification database; (b) an EdL tariff study to identify an appropriate tariff structure and tariff arrangements that will clearly separate EdL’s commercial objectives from GOL’s social objectives and to define an clear and transparent subsidy and cross subsidy mechanism; (c) a rural electrification framework study including review of existing off-grid delivery models and examining alternatives for scaling up off-grid electrification; (d) a study to define the overall financing strategy for the energy sector; and (e) a power distribution system loss reduction study to define the proposed sub-component 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP / GP 4.01) [X] [ ] Natural Habitats ( OP / BP 4.04) [ ] [ ] Pest Management ( OP 4.09 ) [ ] [ ] Cultural Property ( OPN 11.03 , being revised as OP 4.11) [ ] [ ] Involuntary Resettlement ( OP / BP 4.12) [X] [ ] Indigenous Peoples ( OD 4.20 , being revised as OP 4.10) [X] [ ] Forests ( OP / BP 4.36) [ ] [ ] Safety of Dams ( OP / BP 4.37) [ ] [ ] Projects in Disputed Areas ( OP / BP / GP 7.60) * [ ] [ ] Projects on International Waterways ( OP / BP / GP 7.50) [ ] [ ] Policy Framework for On- and Off-Grid Components. The Phase 1 project will include MV and LV subprojects for grid extension and focus on using SHS and VH and GS for off-grid electrification. Limited land acquisition and resettlement impacts are expected. Given the APL approach adopted for the project and potential resettlement and environmental impacts, a resettlement policy framework has been developed for both grid and off-grid component, and environmental policy framework has been prepared for on- and off-grid activities respectively. EDL agrees to apply the same resettlement policy to the associated 115 kV transmission projects even though they are not financed by IDA. 4 Report No: 27015-KH, Project Appraisal Document, Rural Electrification and Transmission Project, November 21,2003. * By supporting the proposed project, the IDA does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 14 Action Plans for First Year On-Grid Program. For grid extension component, the first year program will include 47 subprojects for electrification of 394 villages, only 0.4 ha land areas will be required with 20 percent being farmland, and about 33,000 trees will be affected. RAP covering the 47 subprojects and EMPs for 42 of the 47 subprojects were prepared in line with the policy frameworks and submitted to IDA. EMPs for the rest of the subproject will be submitted to IDA by end July. For off-grid component, since the first year program does not include VH and GS schemes, no RAP and EMP is required. Ethnic People Development Plan. Significant portion of the project beneficiaries are ethnic villages and populations. An Ethnic People’s Development Plan (EPDP) was prepared in compliance with relevant Bank policies for both components to ensure that affected ethnic populations benefit from the project and adverse impacts are avoided or mitigated through a consultative process. The EPDP introduces the basic legal, cultural and socio-economic conditions for ethnic groups in Lao PDR, particularly pertaining to land tenure and natural resource use. In addition, specific consultation procedures and institutional arrangements are proposed to address the particular needs and circumstances of ethnic groups during project implementation. It aims to ensure that development progress fosters full respect for their dignity, human rights and cultural uniqueness. 10. List of Factual Technical Documents 11. Contact point Contact: Barry Trembath Title: Lead Power Engineer Tel: (202) 458-2891 Fax: Email: Btrembath@worldbank.org 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop