Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB984 Project Name Power Sector Priority Investments Region EAST ASIA AND PACIFIC Sector Power (100%) Project ID P087801 Borrower(s) GOVERNMENT OF TIMOR LESTE Implementing Agency Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [X] S 2 [ ] S 3 [ ] S F [ ] TBD (to be determined) Date PID Prepared June 29, 2004 Date of Appraisal Authorization June 29, 2004 Date of Board Approval July 22, 2004 1. Country and Sector Background Country context The economy of Timor-Leste is still recovering from the difficult period following its independence. In 2002, GDP was approximately $ 390 million. Given the small population of 750,000, the GNI per capita was $460. The violence and unrest surrounding the country’s independence in 1999 brought destruction of public and private property and of much of the infrastructure as well as significant disruption to the agricultural and trade cycles. Since then there has been a slow rebound of the economy. The medium-term outlook is for gradual growth and improvement in social conditions. Large-scale emigration after 1999, particularly of skilled labor, has left a human resource gap affecting all sectors. The Government’s dependence on donor support is high as exemplified well by the electricity sector. With aid support decreasing and low levels of local and foreign investments, the Government is concerned about closing its financing gap. Its options are: reducing expenditure, seeking additional funding agency financing, borrowing against future income, or a combination of these. Government policy to date has been to rely on grants rather than loans from donor agencies. Sector Context Significant burden of power sector on limited government resources. Primary responsibility for electricity service provision rests with Electricidade de Timor-Leste (EDTL) which has been a significant burden on government resources since its formation in 1999, despite relatively high tariffs (20 cents a kilowatt-hour for commercial consumers and 16 cents for government and other customers—costs are estimated at about 14 cents). This can be attributed to a combination of factors: (a) dependence on diesel generation burning expensive imported fuel; (b) low generation efficiencies because of excessive reliance on high speed generating plant not designed for base load duties; (c) low distribution efficiencies because of an ageing distribution network in the main load center of Dili; (d) inefficiency of energy use by commercial and residential Page 2 consumers; (e) low collection rate for delivered energy largely arising from that non-payment culture that was an unexpected outcome of the initial “free energy policies” of the UN Transitional Administration. The total installed peak load capacity is 19MW. Between 1999 and 2003, a total of $42 million was spent on Timor-Leste’s power sector, $25million of which was accounted for by the operating costs of EDTL. Most of the remainder went to rehabilitation of the power infrastructure. Donors provided direct financing of approximately $14 million, almost all of which was for rehabilitation. Donors also contributed about $13 million towards the operating deficit of ETDL. Low quality of electricity service. Until recently, Dili has had 24-hour service while all other grids operated for limited periods each day. But this situation took a turn for the worse in March 2004 when power supply in Dili became erratic because of generation equipment failures at Comoro Power Station and distribution problems (generally overloading). Generation capacity has been maintained by using six Norwegian-financed 1MW high-speed diesel units designed for peaking service. Continued base-load use of these units is costly and will shorten their lives considerably. To conserve fuel, power service in Dili has been reduced to 20 hours daily (4am- midnight). Incomplete rehabilitation of regional systems. While the generating capacity in Dili remained largely intact during the disturbances surrounding independence, most of the power stations outside Dili suffered extensive damage. Despite intensive donor supported rehabilitation efforts (mainly aimed at generation), the operational level of power systems in the regions remains very low. Only 45 of the 57 isolated systems in other formerly electrified areas are operational, and only partially cover originally served areas in most of these systems. Service usually limited to 5- 6 hours per day. Completion of the rehabilitation of these systems, if associated with financial sustainability measures, could create opportunities for productive uses of electricity at relatively low cost. Low coverage of access. Accurate data is not available on the extent of access to electricity in Timor-Leste. Current estimates suggest that approximately 40,000 households have access to electricity, implying an electrification ratio of 21 percent. EDTL serves 20,000 connections in Dili which means that the majority of electrified households in Timor-Leste are in Dili. Only five percent of rural households are electrified (approximately 7,000 households) with the remaining 13,000 located in other cities and towns. About 80 percent of the population is currently not served with electricity. Many of the centers of population in the south coast area of Timor-Leste are widely dispersed and require a high cost of connection. Government initiatives in the electricity sector Significant progress has been made in the energy sector since the independence of Timor-Leste. In addition to the significant rehabilitation effort discussed above, the government has been able to: A. proceed with legal and regulatory development, B. develop a Power Sector Development Plan (PSDP) covering a 20 year period, Page 3 C. develop a Sector Expenditure Plan outlining priority investments for the short and medium term, D. employ a management contractor to operate EDTL, and E. improve collections for electricity bills through the installation of 8,000 pre-payment meters among 20,000 EDTL customers in Dili. Legal/regulatory development. Progress in re-establishing electricity services after the events of 1999 was hampered by a legal vacuum that was not fully addressed by early regulations issued by the United Nations Transitional Administration in East Timor (UNTAET). UNTAET therefore established Electricidade de Timor-Leste (EDTL) from the remnants of the pre-1999 power system and associated staff, placing international personnel in managerial positions. The UN led intensive efforts to rest ore the power system. It was not until June 2001 that EDTL’s relationship to the Timor-Leste Public Administration (ETPA) was legally defined, and not until August 2001—immediately prior to the end of the UN administration—that EDTL gained the right to charge Dili consumers for electricity. This right was extended to customers in the districts only in February 2003. The ETPA’s Ministry of Transport, Communication, and Public Works (MTCPW) administers the power sector. The Basic Law for the National Power System, enacted in May 2003, defines the role of the Government in the power system, delegates most of its tasks to a regulatory authority, and favors outsourcing of electricity services to the private sector. Draft decrees for the establishment of a regulatory authority and for the corporatization of EDTL await Government approval. B. Power Sector Development Plan (PSDP). Following the approval of an Electricity Sector Policy Paper in September 2002, a Power Sector Development Plan for Timor-Leste covering a 20-year development period was prepared in 2003 under the direction of Asian Development Bank (ADB). The study establishes the basis for future development of the power sector including generation, transmission, distribution and electrification, and additionally discusses institutional and policy issues. The PSDP includes plans, cost estimates and economic analyses for various scenarios. C. Sector Expenditure Plan (SEP). The Ministry of Transport, Communication and Public Works released a Power Sector Expenditure Plan: Priorities and Proposed Sector Investment Program in November/December 2003 (updated March 2004) with input from the World Bank and the Asian Development Bank. The power SEP identifies the following short-term investments as priorities for the power system: (a) improvement of fuel oil procurement for EDTL; (b) construction of an oil pipeline from the wharf to Comoro Power Station (oil is currently transported by trucks over a 2-3 km distance at an annual cost of $370,000); (c) supplement to generation capacity at Comoro Power Station; (d) reinforcement and reliability improvement of Dili distribution system; (e) energy efficient lamp replacement program; and (f) district/sub-district rehabilitation program. Small power plants, associated with demonstration oil well rehabilitation and gas seep harvesting projects, included in the Environment and Natural Resources SEP, were also listed as priority Page 4 investments in the power SEP. Studies to provide the foundations for medium and long term investments were also identified (listed in Annex 1) including strategic studies to guide further legal/regulatory development and develop a rural electrification framework for Timor-Leste. These two studies are respectively being financed by trust-funded programs administered by the World Bank: the Public-Private Infrastructure Advisory Facility (PPIAF) and the Energy Sector Management Assistance Program (ESMAP). D. Management Contractor for EDTL. As part of the Electricity Sector Policy approved in September 2002, the Govern ment decided to outsource the management of all of EDTL’s operations to CEM of Macao, an internationally recognized utility management company, under a management contract for a period of three years. CEM commenced the contract on March 1, 2004, and has begun to implement urgent measures to improve the overall technical and financial performance of the utility and to provide systematic training to the local staff. There is a strong emphasis on training in the contract and fixed fees are related only to training. E. Prepayment meters. After a difficult start in 2003, EDTL has been able to make considerable progress with pre-payment metering. By end April, 2004, some 8,000 meters have been installed (out of 10,000 meters available), and installation is continuing at a rate of about 500 per week. Existing meter stocks will be exhausted by early June, 2004. Norway has now agreed to finance 17,000 additional meters, and deliveries of these are expected to commence towards end of June. It is hoped that the overall meter installation program will be completed early in 2005. Residential power consumption in the connected areas is dropping noticeably, and overloading of electricity feeders is abating as a result of the installation program and more frugal use of electricity. It is planned to provide the Compact Fluorescent Lamps (CFLs) under a lamp replacement program primarily to the prepayment meter recipients as a further incentive. Donor support The Government has been seeking complementary contributions from international and bilateral donors to fund the most urgent short-term priorities through the implementation of the SEPs. The short-term priorities listed in the power SEP are being addressed as follows: (a) improvement of fuel procurement: the government has launched a pre-qualification exercise in preparation for international competitive bidding. Support to this effort is being financed through an amendment to IDA’s existing Economic Institutions Capacity Building project; (b) construction of an oil pipeline from the wharf to Comoro Power Station: decision has been deferred until the fuel procurement exercise has proceeded further; (c) supplement to base load generation capacity at Comoro Power Station: being addressed through a proposed Japan International Cooperation Agency (JICA) project and replacement of Unit No. 5 (MAK 4) plant at Comoro Power Station under the proposed project; (d) reinforcement and reliability improvement of Dili distribution system: partly being handled under JICA project and partly as a component of proposed project; (e) efficient lamp replacement program: being addressed through energy efficient lamp distribution component in proposed project; Page 5 (f) district/sub-district rehabilitation program: program will commence through transfer of some of existing peak load generation plant in Comoro power station to regional centers after replacement of Unit No 5 under the proposed project; the ADB (which assisted in initial rehabilitation efforts) plans to finance a study to define the scope of a rehabilitation project. Proposed project. The proposed Priority Investments Project responds to Timor- Leste’s urgent need to optimize its utilization of high-cost imported fuel in the power sector, reduce losses, and increase end-use efficiency through the following three components: (a) replacement of the diesel engine of the 2.8 MW generation unit No. 5 (MAK 4) at Comoro Power Station, (b) distribution system rehabilitation in Dili, and (c) distribution of energy efficient compact fluorescent lamps. 2. Objectives The project development objective is the delivery of least-cost, high-quality electricity service with minimum dependence on the government’s budget. This objective will be achieved through improvements in EDTL’s generation capacity, generation and distribution efficiency, and through savings achieved by reduction in demand with the use of energy efficient light bulbs. The key indicators of progress on this development objective are: system reliability, generation and distribution efficiency, and reduction in Government subsidy to EDTL. The Government’s vision till 2020, as stated in the May 2002 National Development Plan (NDP), includes that “people will no longer be isolated because there will be good roads, transport, electricity and communications in the towns and villages in all the regions of the country”. Further, the NDP recognizes that “an effective system of infrastructure and services is crucial for agricultural productivity and poverty reduction, a determinant of business investment, instrumental to human development, and the foundation for private sector development”, and the need “to plan for, provide and manage physical infrastructure that is efficient, cost-effective, and financially sustainable, and which supports the social and economic development priorities of the people Timor-Leste.” This Vision sets the following requirements for the power sector: (a) The power sector will create and maintain reliable and affordable power supplies which meet the needs of immediate areas served, to support economic productivity and quality of life, throughout Timor-Leste. (b) Supplies will be developed to achieve lowest possible costs in the long run, tapping the economic potential of indigenous resources to displace costly imported fuels; indigenous resources to be developed may include natural gas, hydropower, solar, and others. Page 6 Each of the proposed components is in line with the Government’s vision of reliable and affordable power supplies which displace costly imported fuels. 3. Rationale for Bank Involvement There is no Country Assistance Strategy (CAS) for Timor-Leste and the power SEP is the guiding document for World Bank involvement in line with the World Bank-led, donor- supported Transition Support Program (TSP). IDA is the trustee of the Trust Fund for East Timor (TFET), the multi-donor trust fund that has supported reconstruction and development activities since early 2000 through projects implemented by Government ministries. The World Bank and the Asian Development Bank provided extensive input to the SEP and the Bank’s knowledge of the sector is a key reason for the Government’s request for IDA assistance. The rationale for IDA involvement includes the availability of in-house energy sector development expertise, ability to mobilize global experts with field experience, technical support for project preparation, supervision capacity, and development of linkages with other sources of expertise and funding. IDA involvement will also help to ensure quality of the proposed project, while providing necessary project due diligence and other fiduciary responsibilities. 4. Description (i) Replacement of engine at Unit No. 5 (MAK 4) at Comoro Power Station. The objective is to enhance base load generation capacity and reduce fuel costs by replacing the MAK 4 unit engine by a new 2.8 MW unit at Comoro power station. The estimated cost is $1.0 million. (ii) Distribution system rehabilitation in Dili. The objective is to improve service quality and reduce losses through reinforcement and rehabilitation of the Dili system. The estimated cost is $300,000. (iii) Distribution of energy efficient light bulbs/tubes. The objective is to achieve reductions in fuel costs incurred by EDTL through greater efficiency in energy end-use for lighting. The estimated cost is $90,000. 1. Lessons learned and reflected in the project design Experience in the preparation of the TFET Petroleum Technical Assistance project, SEPs and other IDA projects and lessons learned from projects and studies financed by JICA and the Norwegian Development Agency (NORAD) (see Annex 2) underscore the importance of the following as the key factors to the success of the project: a. Full commitment from the Recipient counterpart: the Government has led the development of the power SEP (which includes each proposed component) and is fully committed to implementing reductions in its fuel costs. The decision for the Page 7 allocation of surplus TFET funds for the five SEP short-term priorities was fully supported by relevant ministries and ultimately made by the Prime Minister. b. access to high-quality international consultant expertise: The management contractor, CEM of Macao, an internationally recognized utility management company, will take direct responsibility for this project. CEM has very experienced international staff backed up by home office expertise in Macao. 5. Financing Source: ($m.) BORROWER .02 SPECIAL FINANCING 1.39 Total 1.41 6. Implementation N/A EDTL will be the implementing agency responsible for the preparation and implementation of the project. EDTL is currently being operated under a management contract by CEM (Macao). The procurement work will be carried out under the direct supervision of CEM’s expatriate staff who have carried out similar assignments in utility procurement activity over many years. The ICB contract for the Unit no. 5 engine replacement will be carried out under the supervision of EDTL’s Managing Director. One ICB for energy efficient light bulbs, one ICB in several lots and international shopping (limited to a total of $60,000) for distribution material will be carried out under the direct supervision of EDTL’s Director Technical. 7. Sustainability As indicated earlier, Government commitment and ownership are obvious as the Government’s SEP lists all three components as priority investments. Annex 6 shows that the mandate of the management contractor operating EDTL between March 2004 and 2007, includes a substantial capacity building component. Therefore, the operation and maintenance of the Unit No. 5 (MAK 4) engine and the rehabilitated distribution system is expected to be carried on sustainably by EDTL staff. EDTL’s financial situation is expected to improve significantly over the 2004-2007 period with CEM’s efforts and the completion of the prepayment meter program. The complementarity between the proposed project components and CEM’s mandate as the management contractor is expected to boost the sustainability of this project’s benefits beyond the project’s completion. 8. Lessons Learned from Past Operations in the Country/Sector 9. Safeguard Policies (including public consultation) Page 8 Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP / GP 4.01) [X] [ ] Natural Habitats ( OP / BP 4.04) [ ] [X] Pest Management ( OP 4.09 ) [ ] [X] Cultural Property ( OPN 11.03 , being revised as OP 4.11) [ ] [X] Involuntary Resettlement ( OP / BP 4.12) [ ] [X] Indigenous Peoples ( OD 4.20 , being revised as OP 4.10) [ ] [X] Forests ( OP / BP 4.36) [ ] [X] Safety of Dams ( OP / BP 4.37) [ ] [X] Projects in Disputed Areas ( OP / BP / GP 7.60) * [ ] [X] Projects on International Waterways ( OP / BP / GP 7.50) [ ] [X] 10. List of Factual Technical Documents Power Sector Investment Plan: Priorities and proposed sector investments program, Ministry of Transport, Communication and Public Works, updated March 2004. Power Sector Development Plan for Timor-Leste. Asian Development Bank, 2003. Environmental Management Plan for proposed project. EDTL, 2004. List of distribution materials to be installed during proposed project, 2004. Procurement Plan for proposed project. EDTL, 2004. 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 * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 9