Document of The World Bank FOROFFICIAL USE ONLY Report No: 45791-HN PROJECT APPRAISAL DOCUMENT ON A PROPOSED IDA CREDIT INTHEAMOUNT OF SDR20.2 MILLION (US$30.0 MILLION EQUIVALENT) TO THE REPUBLIC OF HONDURAS FOR A POWER SECTOR EFFICIENCY ENHANCEMENT PROJECT (PROMEF) December 15,2008 Sustainable Development Department Country Management Unit for Central America Latin America and CaribbeanRegion This document has a restricted distribution. and may be used by recipients only in the performance of their official duties, Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective October 31, 2008) Honduras Currency Unit = Lempira 18.896 lempira = 1 US$ US$1.49004 = 1SDR FISCAL YEAR January 1 - December31 ABBREVIATIONSAND ACRONYMS AMR Automated Meter Reading AOP Annual OperationalPlan CAF Andean DevelopmentCorporation(CorporacionAndina de Fomento) CABEI CentralAmerican Bank for EconomicIntegration CAS Country Assistance Strategy CMS CommercialManagement System CNE NationalEnergy Commission(ComisionNacionalde Energia) CPME Committee for the Modernizationof the State (Comisionpara la Modernizaciondel Estado) CQS Consultant Qualification Selection CRMIS Corporate ResourcesManagement InformationSystem cv Curriculum Vitae DA DesignatedAccount DR-CAFTA DominicanRepublic-Central America FreeTrade Agreement EA EnvironmentalAssessment EBITDA EarningBefore Interest, Taxes, Depreciationand Amortization ENEE NationalElectricPower Company (EmpresaNacionalde EnergiaElectrica) EU EuropeanUnion FBS Fixed-BudgetSelection FMR FinancialMonitoring Report FOSODE Social ElectrificationFund(Fondo Social de Electrificacion) GAUREE Autonomous Generation and RationalUse of ElectricalEnergy (Generacion Autonoma y Us0 Racionalde la EnergiaElectrica) GDP Gross DomesticProduct GEF Global EnvironmentalFacility HONDUTEL HondurasTelecommunicationCompany IBRD InternationalBank for Reconstructionand Development ICB InternationalCompetitiveBidding IDA InternationalDevelopment Association IMF InternationalMonetary Fund IDB Inter-AmericanDevelopment Bank IPP Independent Power Producer I R M S IncidenceRecordingManagement System IRR InternalRate of Return LCS Least Cost Selection MIS Management InformationSystems M&E Monitoring and Evaluation FOROFFICIAL USE ONLY NCB NationalCompetitiveBidding NPV Net PresentValue PCBs Polychlorinatedbiphenyls PCN ProjectConcept Note PCU ProjectCoordinationUnit PEU Project ExecutionUnit PHRD Japan Policy and HumanResource Development PPA Power PurchaseAgreement PPm Parts per Million PRSC PovertyReduction Strategy Credit PRSP PovertyReductionStrategy Paper PRSTAC PovertyReductionStrategy TechnicalAssistance Credits QBS Quality Based Selection QCBS Quality and Cost Based Selection SAID1 System Average InterruptionDurationIndex SAIFI System Average InterruptionFrequency Index SBD Standard Bidding Documents SEFIN Secretary of Finance (Secretaria de Finanzas) SDR Special DrawingRights SEMEH Honduras Electric MeteringService Company (Empresa de Serviciosde Medicion Electricade Honduras) SEPA ProcurementPlan ImplementationSystem (Sistema de Ejecucionde Planesde Adquisiciones) SERNA Ministry ofNaturalResourcesandthe Environment(Secretaria de RecursosNaturales y Ambiente) SIAFI IntegratedFinancialManagement System (Sistema de Administracion Financiera Integrada) SIL Specific InvestmentLoan SOEs Statement of Expenditures TORS Terms of Reference TSC Supreme Account Court (Tribunal Supremode Cuentas) TTL Task Team Leader UEPEX AutomatedAccounting System for ExecutingUnits USAID United States Agency for InternationalDevelopment US$/USD UnitedStates Dollars Vice President: Pamela Cox Country Director: Laura Frigenti Country Manager Geoffrey Bergen Sector Manager: Philippe Charles Benoit Task Team Leader: Fernando Lecaros This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. HONDURAS: Power Sector EfficiencyEnhancementProject TABLE OF CONTENTS Page Cover Sheet ..................................................................................................................................... i ISTRATEGICCONTEXTANDRATIONALE . ...................................................................... 1 A. Country and Sector Issues ................................................................................................... 1 B. Rationale for Bank involvement.......................................................................................... 6 C . Higher level objectives to which the project contributes .................................................... 7 I1 PROJECT DESCRIPTION . ..................................................................................................... 7 D. LendingInstrument. Financing Arrangements and Other Approaches .............................. -7 E. Project development objective and key indicators ............................................................. -8 F. Project components.............................................................................................................. 8 G. Lessons learned and reflected inthe project design .......................................................... 10 H. Alternatives considered and reasons for rejection............................................................. 11 I11 IMPLEMENTATION . .......................................................................................................... 12 I Partnershiparrangements.................................................................................................. . 12 J. Institutional and implementation arrangements ................................................................ 13 K. Monitoring and evaluation o f outcomeshesults ................................................................ 14 L. Sustainability ..................................................................................................................... 14 M. Critical risks and possible controversial aspects ........................................................... 15 N. Credit conditions and covenants ........................................................................................ 17 I V APPRAISAL SUMMARY . .................................................................................................... 18 0. Economic and Financial Analyses ..................................................................................... 18 P. Technical ........................................................................................................................... 19 Q. Fiduciary ............................................................................................................................ 20 R . Social ................................................................................................................................. 21 S. Environment ..................................................................................................................... -22 T. Safeguard policies.............................................................................................................. 23 U. Governance ........................................................................................................................ 23 V . Policy Exceptions and Readiness ...................................................................................... 23 Annex 1: Summary Backgroundof the Electricity Sector ...................................................... 25 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ..................34 Annex 3: Results Framework and Monitoring ......................................................................... 36 Annex 4: Detailed Project Description ...................................................................................... 40 Annex 5: Project Costs ................................................................................................................ 47 Annex 6: Implementation Arrangements .................................................................................. 48 Annex 7: Financial Management and DisbursementArrangements .................................... .SO Annex 8: Procurement Arrangements ....................................................................................... 58 Annex 9: Economic and Financial Analysis .............................................................................. 66 Annex 10: Safeguard Policy Issues ............................................................................................. 74 Annex 11: Project Preparation and Supervision ...................................................................... 77 Annex 12: Governance: Framework, Challenges and Action Plan ........................................ 79 Annex 13: Documents in the Project File .................................................................................. 92 Annex 14: Statement of Loans and Credits ............................................................................... 93 Annex 15: Country at a Glance .................................................................................................. 95 Annex 16: Maps ........................................................................................................................... 97 COVER SHEET HONDURAS POWER SECTOR EFFICIENCY ENHANCEMENT PROJECT PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSEG Date: December 15,2008 Team Leader: Fernando Lecaros Country Director: Laura Frigenti Sectors: Power (100%) Sector ManagedDirector: Philippe Benoit/ Laura Tuck Themes: Corporate governance Project ID: P104034 Environmental ScreeningCategory: Lending;Instrument: SPecific Investment Loan B. Partial Assessment Source Local Foreign Total ENEE 8.3 4.0 12.3 International Development Association 11.2 18.8 30.0 (IDA) Total 19.5 22.8 42.3 FY 2009 2010 2011 2012 2013 2014 4nnual 0.5 5.0 10.0 10.0 4.0 0.5 Zumulative 0.5 5.5 15.5 25.5 29.5 30.0 Does the project depart from the CAS incontent or other significant respects? Ref: PAD I.C. [ ]Yes [XINO 1 Does the project require any exceptions from Bank policies?Re$ PAD I K K [ ]Yes [XINo Have these beenapproved by Bank management? [ ]Yes [ IN0 I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Ref: PAD III.M. [ X ]Yes [INo Does the project meet the Regional criteria for readinessfor implementation? Re$ PAD I K K [ X ]Yes [ 3 No Project development objective Ref: PAD II.E., Technical Annex 3 The development objective of the project is to improve ENEE's operational and financial performance, thus contributing to the sustainability of the power sector inHonduras. Project description Re$ PAD IIJ.,Technical Annex 4 The project consists of three components: (i)improving ENEE's commercial and corporate resource management; (ii)rehabilitating ENEE's distribution regional sub-networks; and (iii) strengthening ENEE's institutional capacity and corporate governance. Component 1: Improving ENEE's commercial and corporate resource management includesfour activities: (i)installing automated meter reading equipment (AMR), (ii)installing a new automated commercial management system (CMS), (iii)implementing an incident recording management system (IRMS), and (iv) developing a corporateresources management information system (CRMIS). Component 2: Rehabilitating ENEE's distribution regional sub-networks includes (i)replacing transformers, purchasing related distribution equipment, and disposing PCBs, and (ii)purchasing maintenance equipment, spare parts and materials for distribution networks, mainly heavy vehicles. Component 3: Strengthening ENEE's institutional capacity and corporate governance will support (i)strengthening power sector governance, (ii)analyzing the long-term financial sustainability of ENEE and developing a strategy for commercial operations, (iii)implementing a communication, outreach and participation program, and (iv) project management, monitoring and evaluation and audits. Which safeguardpolicies are triggered, if any? Re$ PAD I K T., Technical Annex 10 Environmental Assessment (OP/BP/GP 4.0 1). Significant, non-standardconditions, if any, for: Re$ PAD III.N. Board presentation: None Loadcredit effectiveness: P > Subsidiary agreement between SEFIN, CPME and ENEE shall be signed. Key project personnel inCPME and ENEEshall be hired. P Formal adoption of the Operational Manual Covenants applicable to project implementation: 11 .I P The Recipient shall establish and maintain, throughout Project implementation, a steering committee responsible for Project oversight and coordination, comprised of representatives o f SEFIN, CPME and ENEE. P The Recipient shall cause ENEE to maintain, throughout Project implementation, an execution unit ("PEU") with composition, functions and responsibilities acceptable to the Association, including the responsibility for the technical implementation of the Project, incoordination with CPME and the relevant departments of ENEE. > The PEU shall be headed by a Project coordinator and assisted by staff in adequate numbers, including an engineer, a financial management/procurement liaison with CPME and an administrative assistant, all with qualifications and experience satisfactory to the Association. P The Recipient, through CPME, shall maintain, throughout Project implementation, a coordination unit ("PCU") with composition, functions and responsibilities acceptable to the Association, including the responsibility for the fiduciary (Le,, financial management and procurement) and monitoring and evaluation aspects o f the Project, in coordination with ENEE. P The PCU shall be staffed with an energy sector specialist, a procurement specialist, a financial management specialist and a monitoring and evaluation specialist, all with qualifications and experience satisfactory to the Association. P The PEU and PCU personnel required for project implementation shall be hired based on professional criteria acceptable to the Association and shall only be replaced for reasons related to performance. P The performance o f key project personnel in the PEU and PCU shall be assessed once a year by an independent firm contracted under terms o f reference acceptable to the Association, and the firm shall be hired by the Recipient no later than 90 days after the Effective Date. > The Recipient shall hire external auditors on financial management and procurement, based on a short list satisfactory to the Bank, no later than 90 days after the Effective Date. ... 111 I.STRATEGICCONTEXTANDRATIONALE A. Country and Sector Issues 1.Country Context 1. Honduras is a lower middle-income country, with a per capita income of US$1,600 and a population o f 7.5 million inhabitants in 2007. It is one of the most open economies in Central America, with exports of goods and services accounting for around 55 percent of GDP. However, Honduras stands out historically as one of the slowest-growing and poorest countries inthe region. 2. Economic growth in Honduras made considerable strides during 2004-2006, at an average rate of over six percent per year (almost twice the rate seen in 2001-2002) while the inflation remained in single digits. Much of this growth was owed to the general expansion in international trade and o f the U.S. economy after 2001. Over the same period, external public debt fell from around 70 percent to an estimated 22 percent, as a result of improved fiscal policies and, more important, the implementation of several debt relief initiatives. Honduras reachedthe Heavily IndebtedPoor Countries Completion point inApril 2005 and benefited from the Multilateral Debt Relief Initiative. The DominicanRepublic-Central America-United States Free Trade Agreement (DR-CAFTA), which came into effect in April 2006, also helpedto raise Honduras's attractiveness to private investors. 3. Honduras's overall macroeconomic performance beganto falter in 2007 owing to several adverse developments. These include a decline in the operating surplus of public enterprises, a rising tendency in public sector wages, and popular pressures to increase the subsidies to transport, fuel and electricity services in order to compensate for the externally induced price hikes. The state-owned National Electric Power Company (ENEE)'s financial losses were estimated at over 2 percent of GDP in 2007 and seemed to continue to rise. Also, the operating surplus of the state-owned telecommunications company, HONDUTEL, has been diminishing rapidly inthe wake o f greater competition after the sector was liberalized inDecember2005. 4. Poverty and inequity remain huge challenges in Honduras. As of 2006, 64 percent of the Honduran population was living inpoverty and 45 percent inextremepoverty. About 74 percent of the poor and 86 percent of the extreme poor lived inrural areas. These poverty indicators had hardly changed from those observed in 1997, due ingreat part to erratic growth patterns, coupled with high levels of income inequality. Lack of access to services disproportionately affects the ` poor in Honduras as evidenced in the electricity sector. National electricity coverage reached 69 percent in2006, but only 44 percent in rural areas where most of the poor are concentrated. 5. Likemany developing countries, Honduras has beennegatively affected by the rapidrise, worldwide, of prices of food and fuel. Both have contributed to inflationary pressures, with the impact of rising food prices disproportionately affecting the poor. Food price inflation increased from 7.9 percent inJanuary 2007 (year-on-year) to 18 percent inNovember 2007 before leveling off at 16.6 percent in April 2008. Since the poor devote a larger share of their income to food, the year-to-year effective inflation rate for the poor was about 2 percentage points above the official inflation rate in December 2007. Initial analysis by Bank staff showed that given the thermal dominated generation mix in Honduras, when oil prices increase by US$ 10/bbl, the 1 generation cost increases by 1.52 US cents, equivalent to approximately 10 percent o f the current tariff. 2. Sector Issues 6. The electricity sector in Honduras i s largely stated-owned and vertically integrated. ENEE owns about 40 percent of generation and 100 percent of the transmission and distribution systems. An Electricity Framework Law was adopted in 1994, well before similar laws appeared inother Central American countries. The law called for the vertical and horizontal unbundling of ENEE,for measures invitingprivate sector investmentand participation, and for the creation of a regulatory commission for energy (Comisidn Nacional de Energia or CNE). However, the reforms that the law foresaw only partially materialized -- it was instrumental in attracting private investment in generation projects, but the distribution and transmission systems, slated for privatization, were never sold. 7. In recent years, ENEE has been troubled by poor financial and operational performance, with two major negative consequences: (i)the company's balance sheet losses amount to a deficit o f over 2 percent o f GDP (approximately US$141 million in2007) and could threaten the stability of the macroeconomic framework and hamper poverty reduction efforts; and (ii)power production i s seriously compromised, which could undermine the economy as a whole. Furthermore, ENEE has accumulated arrears to private electricity generators, which, although primarily a fiscal issue, could also have a negative impact on stability. At the end o f June 2008, the government had cleared all arrears of ENEE to private generators up to end 2007 (approximately 3 billion lempira or US$158 million). However, with fuel oil prices well above ENEE's $75/bbl assumption for most of 2008, new arrears may have beenaccruing. 8. In response to these concerns and at the government's request, the Bank supported a diagnostic study o f the power sector', which outlines options to address short- and medium-term challenges (see Annex 1 for the main findings o f the study). The study identifiedthe main issues Box 1: Power Sector Issues and Options in Honduras Beforethis project was prepared, a power sector strategy study was carried out at the request of the government of Honduras. Concerns regarding the unsatisfactory financial and operational performance of ENEE and its impact on the stability of the macroeconomic framework and on the performanceof the economy as a whole made it necessary to formulate a clear, achievable strategy. This study first presented a diagnosis of the electricity sector, includingENEE's financial performance, fiscal impacts, reliability of supply, institutionaland legal framework, pricing policy and electricity coverage. Subsequent to this diagnosis, it evaluated and recommended the options available to improve sector efficiency, improve sector efficiency, ensure financial sustainability, promote the diversification of energy sources, and increase electrification coverage.The results of the study were culminatedin the "Power Sector Issues and Options" report (July 2007). Throughout the implementationof this study and the preparationof this project,the Bank coordinated closely with other development partners about the approach and different roles of the donors to ensure the recommendations of the study are taken on in a systematic manner. IPower Sector Issues and Options, July 2007. 2 underlying ENEE's underperformance. These include (i)weak corporate governance and institutional instability associated with frequent management changes, (ii)high nontechnical losses and poor bill collection resulting in inadequate revenue generation, (iii) insufficient supply capacity to meet demand, and (iv) below-cost electricity tariffs, coupled with ill-targeted subsidies. 9. Weak corporate governance and institutional instability. ENEE was created as an autonomous state organization responsible for the production, transmission, distribution and commercialization of electrical energy. However, as a growing source o fjobs and a conduit for large financial flows to and from the state and other private actors, it has not remained under autonomous professional management. Political interference and concerns about Honduras's broader institutional environment have contributed to the repeated crises in the electricity sector since the early 1990s. 10. Senior management positions were often occupied by unqualified individuals and were subject to high rates o f turnover, as political leaders used these positions to reward their supporters to gain leverage in ENEE; since 2006, six managers have been appointed to ENEE. The current general manager was appointed inFebruary 2008. 11. InMay 2007, an intervention board (Junta Interventora) was appointed for a period of 90 days to manage the company with the de facto board powers, and the Board o f Directors was suspended during this period. The Junta is headed by the Secretary of Defense and consists of the Secretary of Defense and the Secretary of Finance (SEFIN). This interim structure was imposed to address perceived failings in the corporate management o f the company. Its terms have beenextended twice expiring on September 28,2008 and the government i s extending them for a third time. The Junta Interventora makes decisions in ENEE which would have been the responsibilities o f the Board o f Directors and the general manager o f ENEE. Roles of the Intervention Board, the Board o f Directors and the general manager are not clearly defined, underminingthe overall governance o fthe company. 12. The Secretary o f Environment and Natural Resources (SERNA), and the National Energy Commission (Comision Nacional de Energia or CNE), which are the de facto energy ministry and the regulator, respectively, have only played weak roles in sectoral policy formation and sector regulation. This has been the result o f various factors, including low investment in institutional capacity, frequent rotation and politicized appointments o f management personnel, and the weak policy-making and oversight capacity o f the congress. 13. High technical and nontechnicallosses. ENEE's electricity losses in the transmission and distribution systems have been higher than other countries in Central America (except for Nicaragua). Total system losses were approximately 21 percent in 2007, o f which approximately 10 percent were technical losses and 11 percent nontechnical (namely, nonregistered connections, losses in meter reading and billing, and defaults in payments o f bills). Since February 2007, ENEE has been implementing a loss reduction program (Operation "Scissor" or Operacion Tijera)2 as a key element o f a short-term financial recovery plan. The program has been effective in reducing the losses from 25.4 percent in 2006, demonstrating the importance o f 2This program entailed coordinated action from all Ministriesand government agencies aimingto cut service to (a) delinquent clients, and (b) to any users detectedduringthe operationwith irregular service connectionsor with metersthat hadbeentampered with. 3 direct involvement of top management in the loss-reduction program. The program includes a US$30 million investment in pre-paid meters, tamper-proof connection, and other equipment. Furthermore, ENEE outsources its meter reading, billing, and collection functions to the Honduras Electric Metering Service Company (Empresa de Servicios de Medicion Electrica de Honduras or SEMEH). Lack of clarity in dividing responsibilities between ENEE and SEMEH regarding consumer management has not helped implement an aggressive loss reduction program. Furthermore, the absence of adequate management information systems at ENEE makes targeted loss reduction interventions difficult. 14. Toward an insufficient power supply. ENEE faces a pending energy shortage. As of April 2008, the total installed capacity in Honduras was 1,250 M W while the peak demand was 1,156 MW, resulting in a reserve margin of less than 10 percent. The annual increase in demand i s estimated to be about 80 MW. As long as ENEE's system losses are not reduced, electricity demand will outstrip supply much earlier than originally expected. In summer 2007, power started to be rationed. 15. In late 2007 the government contracted 250 MW emergency power directly from private investors. Two companies were to provide 100 and 150 M W respectively from coal-fired plants. However, after reviewing the contracts the Tribunal Supremo de Cuentas (TSC) recommended that the congress not approve them in light of concerns about the procurement process and technical specifications of the bidding documents. Since that time, ENEE has renegotiated with the two prospective IPP suppliers and been successful with one of them. The renegotiated contract was submittedto the congress and approved inOctober 2008. 16. The predominantly thermal power system makes Honduras highly vulnerable to high and volatile oil prices. The hydro-dominated generation system of the mid-1990s was converted to a thermo-dominated system because hydroelectric development became more expensive when funding through interest-free loans from international financial institutions was cut and private investors perceived lower risks and shorter maturities in thermal generation projects. Honduras now depends on imported fuels for 63 percent of its power generation (almost all thermal generation under power purchase agreement). The cost of energy purchases and fuel expenses doubled from 2001 to 2006, owing to a larger share of thermal generation and the steep increase inheavy fuel oil prices. 17. The country has a significant potential of untapped indigenous renewable energy resources. Giventhe likely long-term trend of high oil prices, these resources could be developed at competitive prices, reversing the thermal-dominated system to a hydro-dominated system again. Currently, only hydropower and biomass are used on a large scale for electricity generation. Sixteen new large hydropower projects that are expected to be commissioned before 2011 and three geothermal energy projects have been studiedindetail. Nonetheless, the potential for developing other renewableenergy resources i s yet to be explored indepth. 18. Below-cost tariffs and ill targeted subsidies. Electricity tariffs in Honduras have long been below cost recovery level. ENEE's current tariffs do not reflect the economic costs of supply. Although average nominal tariffs increased by 52 percent between 2001 and 2006, when expressed inreal terms they remained practically constant. The tariff analyses show that in 2007 ENEE's prices covered approximately 83 percent of the economic cost of supply and that the tariff structure was distorted, with residential prices substantially below economic cost, The average residential tariff was 60 percent of the economic cost of supply, and only 54 percent 4 after deducting the government's direct subsidy. The tariffs had been frozen since 2006 and were not adjusted to the increase in fuel prices untilJanuary 2008. During2008, there have been two adjustments in tariffs and subsidies corresponding to increases in fuel prices. The tariff increase amounted to about 34 percent over the 2007 level, covering the operational deficit of ENEE. However, when the fuel oil prices kept increasing in early 2008, tariffs remained insufficient to cover production costs. 19. The Electricity Law provides for cross subsidies in favor o f small residential consumers. Ifthe lawwere strictly applied, these subsidieswould betargeted at residentialhouseholds with a monthly consumption no greater than 50 kWh. However, the current subsidy structure does not target them. In 2007, only 14 percent o f the total subsidy benefited households with an average electricity consumption below 1OOkWWmonth. Infact, the government provides direct and cross subsidiesto residentialusers consuming up to 300kWWmonth. 20. ENEE's earning before interest, taxes, depreciation and amortization (EBITDA) was near zero between 2002 and 2006, and fell to negative US$ 22 million in 2007. Net losses from operations hovered around US$140 million for 2007, equivalent to over a quarter o f gross energy sales by ENEE or over 2 percent o f Honduran GDP (US$ 5.3 billion in 2007). This financial crisis can be explained by a combination o f factors: (a) poor performance (highelectricity system losses, mainly owing to theft, fraud, and illegal connections); (b) the vulnerability o f thermal- based generation costs to highand volatile international oil prices; (c) high costs o f the long-term power purchase agreements contracted in the 1990s, which reflect high market risks and expensive emergency solutions; and (d) an average electricity tariff that i s below efficient supply costs. The financial losses can no longer be compensated with the rent from hydroelectric resources. 21, Preliminary financial projections showed that the 27 percent tariff increase planned for 2008 (the actual increase was 34 percent) would cover generation costs (purchases and fuel) but not other operating costs. A cumulative financial deficit o f 4.78 billion lempira (US$ 253 million) i s foreseen by 2012. The deficit for 2008-2012 i s estimated at 11-13 billion lempira (US$590 million), which includes the operating deficit and US$337 million for debt service and investment for which there i s no financing. 3. ProposedGovernment Strategy 22. Given the precarious situation o f ENEE, the government issued an Emergency Decree in June 2007 to ensure sustainable electricity supply, restore ENEE's financial health and strengthen the institutions of the electricity sector. In 2008, the government approved in its budget 4.0 billion lempira (equivalent to US$212 million) for capitalization of ENEE to cover arrears and part o f its deficit. It has also entered into an agreement with Venezuela to obtain diesel through the PetroCaribe agreement by means of concessional loans; this will generate resources for the financing o f infrastructure through the PetroCaribe trust fund. 23. In the short and medium term, the following major actions are planned and/or being implemented: Investmentsinmaintenance and rehabilitation of generation plants, contracts for 250 MW o f emergency thermal power, the development o f 100 MW o f renewable- and 5 bagasse- based new generation (100MW for new wind capacity were approved on October 2008), andthe implementation of a pilot efficient lightingprogram. Implementation of a loss reduction program, aiming at reducing the total loss from 20.7 percent in 2007 to 10 percent in 2013, and the nontechnical loss from approximately 12 percent to 2 percent by 2011. Adjusting tariffs towards the recovery of the economic cost of supply and focusing subsidies on poor households. As the first step, effective in January 2008 and May 2008, the average tariff has been increased by 11 percent and 16 percent respectively through adjustments inthe fuel component of the tariff. Improvingthe quality of electricity supply and customer services Rehabilitating and strengtheningthe distribution networks Expanding the national electricity coverage to 79 percent by 2011 Reducingnonpayment to 2 percent. Strengthening ENEE management and restructuring ENEE through independent businessunits. Strengthening the distribution business functions, including the establishment of a central unit for distribution and commercialization. Eliminatingthe operating cost deficit Reviewinghenegotiating the contract with SEMEH Improving ENEE's income sources. Improving transparency and public access to information. Rationalizing the allocation and use of humanresources 24. Inthe longterm, the following major actions are planned: 8 Investment in hydroelectric projects, transmission and distribution. The potential hydro projects include Patuca I11 (lOOMW), Tornillito (160 MW), Los Llanitos (98 MW), Jicatuyo (173 MW) and El Tablon (20MW), which are expected to come online in2013-2015. 8 Promoting hydropower and other renewables to reverse the current thermal- dominated generation mix. 8 Initiating a competitive processfor purchasing renewable-basedelectricity. 8 Implementing an energy efficiency program 8 Implementing other thermal projects to complement renewables and energy efficiency programs. 8 Eliminating ENEE'sdeficit. 25. A multi-donor approach has been adopted to support the government in implementing this strategy. The donors have coordinated their dialogue with the government and have assumed their respective roles under the aegis of a single sector strategy (see Section 1II.A on partnership arrangements). B. Rationale for Bank involvement 26. Bank involvement, through this project and other instruments, is essential to reduce the large fiscal impact of losses inthe sector. First, the Bank has extensive experience worldwide in projects o f loss reduction and enhancement of commercial operations (most recently, in the 6 Dominican Republic, Haiti, Tajikistan, Albania, etc.) and has learned valuable lessons which have beenincorporated into the design of this project (see Section I1on Lessons Learned). 27. Second, the Bank plays a leadership role in coordinating with other donors. The Bank has beenworking to leverage financing from the IDB, USAID and CABEI, and also worked closely with IMF on the development of the Stand-By Arrangement. The arrangement became effective on March 25, 2008 and included two energy sector-related conditions: to increase tariff to cover operating costs of ENEE and to eliminate arrears of ENEEto private generators. 28. Third, the Bank has carried out a strong policy dialogue with the government on the electricity sector through the energy sector strategy study, the PRSTAC, and the US$1.O million PHRD grant executed by the government for project preparation. Through these projects and instruments, the Bank is assisting in formulating and implementing the strategy for the financial recovery of the sector and the improvement of ENEE's management. 29. Fourth, given the variety and complexity o f the challenges faced by ENEE, external assistance provides an important support for ENEE to meet them. The work of the Bank under this project, which focuses on the distribution sub-sector and various management issues, is complemented by IDB's support, which is focused on the transmission sub-sector. These represent the key areas of ENEE's operations since the majority of generation i s in private sector hands. C. Higher levelobjectives to which the project contributes 30. The proposed project will contribute to achieving the first strategic objective of accelerating equitable economic growth and employment generation set forth in the Country Assistance Strategy 2007-2010 (CAS, document number: IDA/R2006-019613, presented to the Board on November 11, 2006). It also supports the broad poverty reduction objective laid out in the Poverty Reduction Strategy (PRS 2001) by contributing to the pillar of accelerating economic growth. The project objective is also in line with the present government's priority to public sector transparency, employment generation, environmental protection and a stronger results orientation across the public sector. 11. PROJECT DESCRIPTION D, LendingInstrument,FinancingArrangements and Other Approaches 3 1. The total cost of the proposed operation i s US$ 42.3 million. A Specific Investment Loan (SIL) of SDR 20.2 million (US$30.0 million equivalent) i s proposed. This instrument i s viewed as more appropriate than an Adaptable Program Loan which would require the delineation o f a broader and more extensive reform program than what is currently envisaged by the government of Honduras and what can be supported by the availability o f the International Development Association (1DA)'s credits. An SIL is appropriate to address important shorter-term financial and operational challenges. The IDA credit will be made to the Republic of Honduras on hardened IDA terms that are a maturity o f 20 years with a 10-year grace period and principal 7 repayment of 10 percent per annum for years 11-20. Project implementation is expected to last four years. 32. As a complement to IDA'S$30 million contribution, US$12.3 million will be providedby ENEE in cash and in kind, mostly for the rehabilitation of the distribution sub-networks and project implementation. The Republic of Honduras will be the borrower and will transfer US$ 25.0 million of the Credit to ENEE as a sub-loanand the rest of the Credit to ENEE as a grant. The terms of the sub-loanto ENEE are expected to be the same as the hardenedIDA terms and will be specifiedin a Subsidiary Agreement. Such Subsidiary Agreement will be signedbetween the borrower representedby the Secretary o f Finance and the Presidential Commissionfor State Modernization(Comisidn Presidencial de Modernizacidn de Estado or CPME) on the one hand andENEEonthe other hand. 33. In parallel, the Inter-AmericanDevelopment Bank (IDB) is financing a complementary project of approximatelyUS$48.0 millionfocusingontransmission, the first phaseof which was approved in September 2008 for US$ 28.0 million. The Central American Bank for Economic Integration(CABEI) is expected to contribute approximately US$25.O million to the sector, of which US$lO.O million would be for an office building for ENEE and US$lS.O million for additionalinvestments inrehabilitationof distributionnetworkscomplementaryto this project. E. Projectdevelopmentobjectiveand key indicators 34. The project development objective is to improve ENEE's operational and financial performance,thus contributingto the sustainabilityof the power sector in Honduras. 35. Key performanceindicatorsfor the project would include Increaseincash recoveryindex (CRI)3ineach ofthe three distributionregionalsub- networks; Annual decrease in systemaverageinterruptiondurationindex (SAIDI) and; Annual decreasein systemaverageinterruptionfrequency index (SAIFI). F. Projectcomponents 36. The proposedproject would support three main components: (i) improvement of ENEE's commercial and corporate resourcemanagement, (ii) rehabilitationof distributionnetworks,and (iii) strengthening of ENEE's institutional capacity and corporate governance. The detailed descriptionis presentedinAnnex 4. Component1:ImprovingENEE`s commercialand corporateresource management(Total: US$18.5 million,IDA: US$ 16.1million) 37. This component will improve the commercial performance o f ENEE by providing the company with informationtools for a modernand efficient management of its customers and of the services it provides.The componentincludesthe following activities: (i) installingautomated meter reading equipment (AMR), (ii) installing of a new automated commercial management system (CMS), (iii) implementingan incidence recording and management system (IRMS), and (iv) developinga corporateresources management informationsystem (CRMIS) for ENEE. The The CRI formula is: (electricitybilled to consumers by distribution company/ electricitypurchasedby distribution company) multiplied by (electricity billings paidby consumersielectricity billedto consumers). 8 CMS and I R M S will be developed and implementedunder the structure o f the new distribution and commercial unit (supported under component 3), while the CRMIS will be integrated into the entire company. Component2: Rehabilitatingdistributionnetworks (Total: US$14.6 million,IDA: US$ 7.4 million) 38. This component will improve the reliability and reduce technical losses in ENEE:s distribution systems by strengthening the distribution grid, substations, and distribution equipment for supervisory control, voltage control and switching. It will support the investment plans developed by ENEE for its three distribution sub-regions. Given the limited resources available, this project will not able to meet the total financing needs for rehabilitating the distributionnetworks. Instead,this project component will focus on the following activities: (i) replacing transformers, purchasingrelated distribution equipment, and, for the PCB-containing transformers, disposing PCBs, and (ii) purchasing maintenance equipment, spare parts and materials, mainly heavy vehicles. Inthe meantime, ENEE will use its own resources or pursue other sources of financing, includingthe government, CABEI and IDB, to implementthe entire investment plans. If more IDA resources become available, they will also be directed to this component, for which an amendmentto the project's financing agreement will be required. Component3: StrengtheningENEE's institutionalcapacity and corporategovernance (Total:US$6.2 million,IDA: US$3.5 million) 39. This component will improve the governance and financial context in which ENEE conducts its operations,notably by (i) strengtheningpower sector governance (see Section Uand Annex 12 for a fuller description), (ii) analyzingthe long-termfinancial sustainability of ENEE, including tariff structure and subsidies, and developing a strategy for commercial operations (directly related to dealing with customers), (iii) implementing a communication, outreach and participationprogram, and (iv) projectmanagement,monitoringand evaluation,and audits. (US$ million) 9 parts and materials, mainly heavy vehicles 3. Strengthening ENEE`s institutional capacity and corporategovernance 3.5 2.7 6.2 3.1 Strengthening power sector governance 0.8 1.o 1.8 3.2 Analyzing the long-term financial sustainabilityo f ENEEand developing a strategy 0.5 0.5 for commercial oDerations 3.3 Implementing a communication, outreach and 0.7 1.4 participation program 0.7 3.4 Project management, monitoring and evaluation, and audits 1.5 1.o 2.5 Total Baseline Cost 27.0 12.3 39.3 Physical Contingencies (5%) 1.5 1.5 Price Contingencies (5%) 1.5 1.5 Total Proiect Cost 30.0 12.3 42.3 G. Lessons learned and reflected in the project design 40. Project design has benefited from the Bank's analytical work and lending projects on utility restructuring and the lessons learned on power sector reform in both developing and developed countries. Lessons learned and reflected inthis project include: UtilityEfficiencv: a) The Independent Evaluation Group (1EG)'s Honduras Country Assistance Evaluation FY1994-05 states that "the most urgent task in public infrastructure i s to transform the power company into a reliable low cost provider.,.". This project directly targets the public utility ENEE and aims to improve the performance o f its distribution and commercialization business, thereby reducing the cost o f its electricity services. b) Investmentsshould first be steered to the distribution sector of the power supply chain if increased efficiency i s the priority, because o f huge losses-both technical and nontechnical-as inother Latin American countries. This project is primarily focused on the distribution and commercial businessof ENEE. c) Government support i s needed for reducing the theft o f electricity and materials and nonpayment of bills by electricity users, providing subsidies for a transitional period, and ensuring that its departments and agencies pay their electricity bills regularly. A government can publicly demonstrate its commitment by the passage and enforcement o f antitheft legislation that allows for disconnection and prosecution o f those who steal electricity, including the politically connected ones. ENEE has initiated "Operation Scissor" for this purpose since late 2007 and has been effective in reducing illegal connections and default in payments. However, to amplify the impacts, ENEE would need better information systems and a customer database. Through this project, ENEE will be equipped with modern commercial management information system and updated customer databases that allow the company to regulate metering and billing functions. 10 The project will also promote customer participation and self regulation to reduce illegal connection and non-payments, including public entities which are one of the largest defaulters inpayments. FinancialSustainabilitv: Enhancing the financial sustainability o f utilities i s not simply a function o f tariff levels, but also of controlling losses. The project will lead to reduction in commercial and technical losses, thus enhancing revenue generation in ENEE. Moreover, the project will provide technical assistance in updating tariff and subsidy structure towards long-term financial sustainability o f ENEE. Increasing the CRI requires a broad approach linked not only to improving the ability to meter and monitor, but also to inducing greater willingness to pay by improving the reliability o f the network and quality o f services. The government has already taken legal and regulatory steps necessary for reducing losses and increasing payment o f electricity bills, but these need to be complemented by both physical improvements through investments in the distribution network and effective communications with the expected beneficiaries, both o f which are supported under this project. Governance: Restructuring o f ENEE and the creation o f independent business units for distribution, transmissioddispatch and generation provides incentives to improve efficiency. This constituted one o f the recommendations o f the power sector strategy study for Honduras and i s beingcarried out through the support o f the Bank's PRSTAC. Inadequate transparency and accountability o f the services provided by utilities are difficult to address and require a multi-faceted approach. This project i s structured around a commitment from the highest governmental authorities to address these weaknesses in the sector and will support a series of multi-faceted actions delineated in Annexes 4 and 12. Strengthening management o f utilities involves addressing the overall corporate governance context in which the utility must operate. Discussion o f actions to improve corporate governance was a central part o f project preparation and design. This project has done a detailed governance assessment and laid out a suite o f actions to address various governance challenges, improve the corporate governance structure o f ENEE and enhance its autonomy (see Annex 12 for details). Fiduciary capacity o f the government agencies in Honduras needs to be strengthened to ensure proper and effective implementationo f Bank projects. The project team carefully reviewed implementation arrangements in other Bank projects and lessons learned from the recent INT investigations in Honduras and proposed several actions in strengthening the in-country fiduciary capacity and safeguarding the procurement and financial management transactions (see Annexes 7, 8 and 12). Alternatives considered and reasons for rejection 41. Project Approach. During the project concept note (PCN) stage it was considered to design a utility restructuring project in the form of an Adaptable Program Loan covering a 11 broader and more extensive reform program and supported by a larger lending envelope or a program involving more aggressive reforms to privatize ENEE and establish a separate Secretary o f Energy. These alternatives were rejected for the following reasons: (i)the IDA resources available for Honduras are limited; and (ii)more extensive reforms are premature at this stage and ill-adapted to the current sectoral and political context in Honduras and the weak institutional and regulatory capacity inthe sector. The creation o f a separate Secretary o f Energy was attempted in the past but did not gain sufficient political backing to make progress in government or in the congress and i s unlikely to make progress now, given the current political climate, the upcoming presidential election inNovember 2009, and ENEE's financial crisis. 42. Project Focus. Another project alternative was to focus the project on generation and/or transmission instead o f the distribution business of ENEE, given its myriad o f problems. However, after consultations with the government and other donors, it was agreed that, in the short term, the biggest gain in efficiency would be through focusing on distribution, with loss reduction as an immediate priority of the government to address the prospect o f an impending energy crisis. In addition, it was agreed betweenthe government, the Bank and IDB that IDB would focus its support on the transmission sub-sector (see discussion below). As this project would be the initial step to improve the efficiency in distribution, the Bank plays a catalytic role in mobilizing other investments meeting further needs in the power sector. The Bank's comparative advantage in providing both investments and technical assistance helps lay the foundation for other donors to participate. 43. Project Management. An alternative to have a technical implementation unit housed outside ENEE was rejected because the opportunity would be lost for strengthening ENEE's implementation capacity for its long-term sustainability. The procurement/financial management functions for the project are to be handled in CPME to minimize the risk o f delays in project implementation. CPME currently executes the PHRD grant and other technical assistance projects o f the Bank and has performed satisfactorily. 111.IMPLEMENTATION I. Partnershiparrangements 44. The Bank coordinates closely with IMF, IDB, CABEI, USAID, IFC, and European Union (EU) about the strategy for recovering the power sector. The donor partners agreed on a single package o f assistance to reinforce common messages and for each to play a role based on its comparative advantage. USAID will support management contracts; IDB will finance transmission; and CABEI, the IDB private sector window, and IFC will support small generation projects. EU has a multi-year program in the energy sector o f Honduras, including support for small renewable energy project, an energy efficiency campaign, and community-based programs in reducing losses in distribution. It is also providing complementary financing a micro-hydro project with the World Bank under the rural electrification project for which ENEE i s the technical implementingagency. 12 Donors Governance Losses Supply Tariff/Subsidy Capacity Policy WBIIDA X X X X IDB X X IMF X X 1CABEI I 1 x 1 X I I USAID X IFC X EU X X X 45. The partners have fielded joint missions, maintained a highly coordinated dialogue with the government and kept each other informed on different programs. They maintained one voice in agreeing and communicating to the government on the preconditions (Le,, tariff adjustment, reorganization o f ENEE by establishing independent business units) needed in order to proceed with the assistanceto the power sector. J. Institutionaland implementationarrangements 46. The approach taken to implement this project takes into account two factors: (i)full involvement o f ENEE inall substantive issues pertaining to the design and implementation o f the project to ensure that the project helps build institutional capacity within the company; and (ii) efficient procurement and financial management arrangements with CPME to enhance the prospects for timely execution and full compliance with Bank rules without imposing an excessive burdenon the administrative capacity o f ENEE. 47. Based on the institutional analysis o f the sector, it was agreed that the optimal way to achieve these implementation objectives i s to entrust ENEE with the technical content o f the project and to entrust CPME with procurement and financial management. ENEE already established a project office to manage the IDB transmission project. This office will be strengthened to coordinate the technical aspects of this project with the participation o f the new distribution and commercialization unit (whose composition i s specified in Annex 4), three regional distribution units and related departments. CPME will hire and maintain necessary personnel dedicated to this project, at a minimum, including an energy sector specialist, a procurement specialist, a financial management specialist and a monitoring and evaluation specialist. 48. ENEE's technical team will work closely with CPME throughout the implementation of the project. CPME will be responsible for the management of funds and procurement transactions in accordance with the procurement and financial management guidelines o f the Bank. CPME will also have the responsibility to prepare all the progress reports with technical inputs from ENEE and to provide support to the ENEE team to ensure that any project documents developed by the ENEE team comply with the Bank guidelines and the requirements 13 stated in the Operational Manual o f the Project. CPME will sign the contracts with contractors under the project. ENEE will be responsible for preparing the Annual Operational Plan (AOP), technical specifications, and terms o f reference; ENEE will also participate in bid evaluation and contract supervision and authorize payment requests for CPME processing. K. Monitoring and evaluation of outcomeshesults 49. A monitoring and evaluation (M&E) system will be set up at the beginning o f project implementation to measure progress towards the achievement o f the project's physical outputs and the intermediary and final outcomes and compliance with the established procurement, financial management and social and environmental safeguards procedures. Key performance indicators are specified in Annex 3. CPME will manage the M&E system with inputs from ENEEand assistancefrom consultants on a need basis. L. Sustainability 50. The long term sustainability o f ENEE will be achieved by improving the company's financial viability and management capacity and stability. The project has focused in this regard with the following actions: (i)improved metering and billing systems and distribution networks, (ii)approval of a short-term financing plan for the sector, including tariff adjustment, (iii) appointment o f a competent distribution and commercial management team, and (iv) an effective corporate governance structure. 51, The first of the above actions is the main part of this project and will play a significant role in improving the CRI and enhancing ENEE's revenues. It is necessary but not sufficient conditions for the sustainable operations of ENEE. 52. The remaining actions are built into Component 3 o f the project. The second action is already under way as demonstrated by two tariff adjustments already effected in the first half o f 2008. Further considerations regarding the adequacy o f the tariff and the soundness o f the subsidy schemes will be addressed through the technical assistance for long-term financial sustainability of ENEE under Component 3 and an ongoing dialogue with government on the impact o f tariffs and subsidy on sustainability o f the sector and o f the macroeconomic framework. In addition, the communication and participation program under Component 3 of the project, which aims to ensure local ownership o f the approach by the different stakeholders and the increased consumer satisfaction resulting from the improved quality of service, will enhance the government's political ability to raise tariffs as necessary. On the action o f governance, during project preparation, an assessment was carried out for ENEE with a view to identifying governance reforms to improve transparency and accountability o f the utility, improve corporate governance and strengthen ENEE's capacity in fiduciary aspects of its operations. A suite of measures have been proposed and are to be implemented in connection with this project, under the PRSTAC or using ENEE's own resources. See Annex 12 for the results o f the assessment and the proposed action plan. 14 M. Critical risks and possiblecontroversial aspects 53. The overall project risk is substantial. However, it is also a high reward operation given the importance o f addressing the issues in the electricity sector for the macroeconomic stability and the competitiveness o f the Honduran economy. Risks RiskMitigationMeasures RiskRating W I Mitigation T o project development objective: Macroeconomic instability The Stand-By Arrangement (SBA) with the Substantial arising from fiscal pressures IMF includes conditions on performance o f and deterioration inenergy ENEE(Le. tariff increase, elimination of arrears sector performance. Fiscal with private generators). This project also pressures increase due to provides TA to monitor and update the deteriorating performance o f financial situations o f ENEE and make public enterprises and recommendations as needed. increasing public wage bill. Deterioration inENEE performance could lead to power cuts impacting economic performance. Instability and energy crisis would delay project preparation and/or increase implementation risks. Oil price volatility The government took actions to raise tariffs in Substantial response to fuel price increase inearly 2008. The project will provide technical assistanceto look into the long-term financial sustainability o f ENEE, including the impacts o f oil price volatility on tariff. Lack o f competence and This risk will be addressedby upfront actions, Modest stability inthe distribution and such as attracting and retaining professional, commercial management o f competent and independentmanagers to be ENEE appointed through a transparent and competitive selection process (Component 3.1). Failure to manage the political Duringproject preparation, the Bank discussed Modest opposition due to with various government agencies about the consequences such as social, economic and political ramification o f increases in electricity bills the sector strategy and the measures to stemmingfrom meterupgrade minimize the impacts. The project includes a or replacement component o f design and implementation o f a communication and outreach strategy to Dromote awareness and collaborative efforts 15 among consumers and other stakeholders. Lack of support by the In2008, the government capitalizedENEEwith Substantial government to provide short 4.0 billion lempira (equivalent to US$210 and mediumterm financial million). The government intendsto further supportto ENEE capitalize ENEEwith budget transfer using the IDA resources andpart ofthe credits from the "PetroCaribe" agreementto ENEE. This issue o f financial support to ENEE i s also being discussed bv IMF with the government. Reversal of the government The Bank together with IMF and other donors High policy on tariff and subsidy, will continue to engage the government in the reducing ENEE's revenue and policy dialogue throughout project jeopardizing its financial implementation. health Weak corporate governance The government has endorsed a suite of actions Substantial structure and unstable to address the direction of corporate managementteam governance and appointment and performance evaluation of members of management and board of directors. The goal is to establish a sound framework for strengthening the governance in the sector and engage key players inestablishing the framework insteadof aiming for short-term results (see details in Annex 12 on governance). T o comDonent results: Distributionnetwork The project design has incorporated lessons Modest rehabilitation may not prove learned from other countries and within ENEE effective inreducing technical inaddressingthis issue. The project design also losses and improving service includes appropriate monitoringto detect quality. failures during implementation and provide advisory services for corrective actions. The Bank team will maintain close coordination with the government and other donors to direct more investmentsto distribution as needed. Weakening o f implementation Require dedicated fiduciary staff in CPME and Modest capacity due to a high rotation technical staff in ENEE for implementing the of government personnel project by hiring staff consultants. Consultants during the political cycle can only be dismissed for reasons related to performance. One of the fundamental components of the project i s to strengthen the management information systems of ENEE to ensure the sustainability of its operations, making it less susceptible to personnel change. IWeak procurement capacity in Procurement functions will be handledby a High 16 ENEE qualified team inCPME with assistance o f consultants as needed. CPME has delivereda satisfactory performance inexecuting the PHRD grant and will be further strengthened for fiduciary matters o f this project. However, CPME has no experience inprocurement on large contracts and on small works. The CPME performance will be evaluated every six months, and the risk may be downgraded based on the actual performance o f CPME. Weak financial management FMfunctions will be handledwith a qualified Modest capacity in ENEE team in CPME with assistance o f consultants as needed. CPME has delivered a satisfactory performance in executing the PHRD grant and will be further strengthenedfor fiduciary matters o f this project. N. Credit conditions and covenants 54. Conditions by or before effectiveness: R Subsidiary agreement among SEFIN, CPME and ENEE i s signed. R Key project personnel in CPME and ENEE shall be hired. R Operational Manual has beenadopted by CPME and ENEE 55. Covenants: P The Recipient shall establish and maintain, throughout Project implementation, a steering committee responsible for Project oversight and coordination, comprised o f representatives o f SEFIN, CPME and ENEE. P The Recipient shall cause ENEE to maintain, throughout Project implementation, an execution unit ("PEU") with composition, functions and responsibilities acceptable to the Association, including the responsibility for the technical implementation of the Project, in coordination with CPME and the relevant departments o f ENEE. P The PEU shall be headed by a Project coordinator.andassisted by staff in adequate numbers, including an engineer, a financial management/procurement liaison with CPME and an administrative assistant, all with qualifications and experience satisfactory to the Association. R The Recipient, through CPME, shall maintain, throughout Project implementation, a coordination unit ("PCU") with composition, functions and responsibilities acceptable to the Association, including the responsibility for the fiduciary (i.e., financial management 17 and procurement) and monitoring and evaluation aspects o f the Project, in coordination with ENEE. P The PCU shall be staffed with an energy sector specialist, a procurement specialist, a financial management specialist and a monitoring and evaluation specialist, all with qualifications and experience satisfactory to the Association. P The PEU and PCU personnel required for project implementation shall be hired based on professional criteria acceptable to the Association and shall only be replaced for reasons related to performance. P The performance of key project personnel in the PEU and PCU shall be assessed once a year by an independent firm contracted under terms o f reference acceptable to the Association, and the firm shall be hired by the Recipient no later than 90 days after the Effective Date. P External auditors on financial management and procurement, based on a short list satisfactory to the Bank, shall be hiredno later than 90 days after the Effective Date. IV. APPRAISAL SUMMARY 0. Economic and FinancialAnalyses 56. Project Economic Analysis. The economic benefits o f this project include reduction in technical losses and improved service quality. The economic benefits included in the quantitative analysis consist o f resource savings associated with new metering equipment and loss reduction only. The installation o f automated meter readers reduces theft with an economic effect and a financial effect. 57. The physical consequence o f instituting this measure i s expected to lead to reduce total losses from approximately 20-25 percent o f generation to around 10-15 percent o f generation, i.e. a reduction o f 10 percent or about 700GWh per year. Current billed consumption o f large users which are candidates to having AMR equipment installed amounts to around 2,900GWh per year, which would imply that their actual consumption is on the order o f 3,600GWh per year. Whenthe meters are installed and fraudhnder-billing i s eliminated, these consumers are likely to decrease their consumption, i.e. they will not maintain their consumption level at 3,600GWh. The analysis assumes a conservative reductionof 1percent inconsumption levels. 58. The economic benefits from reducing technical losses are less speculative; the project i s assumed to reduce technical losses by 2 percent, resulting in energy savings at peak o f around 1lGWh in the first year. They are valued as savings at the generation level, at peak, and at the corresponding marginal cost for energy and capacity, which i s considered representative o f the marginal cost from ENEE's energy purchases from independent power producers. This i s a conservative evaluation in the sense that it does not take into account distribution and transmission savings, which are implicitly considered as sunk costs. The economic results from an evaluation o f the project's costs and benefits are as follows: 18 I Summarv of Resultsfor EconomicEvaluationof Proiect I I Present Value o f Costs $24 million I I Present Value o f Benefits $38 million Net Present Value $14 million IRR 20% 59. Project Financial Analysis. The financial consequences o f improved metering and distribution management in component 1 consist o f (i)savings in production costs equal to the resource savings assessed in the economic analysis, and (ii)increased revenues to ENEE from losses which will now be billed to consumers. The benefits arising from Component 2 and the reduction o f technical losses are essentially the same as those inthe economic analysis. 60. The financial analysis yields very highreturns due to component (i)above and to the large recovery o f unbilledenergy: Summary of Resultsfor FinancialEvaluationof Project Present Value o f Costs $24 million I Present Value of Benefits $418 million Net Present Value $394 million IRR >loo% 61. Sensitivity analyses corroborated the justification o f the project from the economic and financial standpoints. P. Technical 62. The project would respond to the difficulty in improving metering, billing and collection due to (a) the lack o f an organizational structure and a distribution management model oriented towards an integrated administration of clients, and (b) the poor quality o f ENEE's information systems regarding commercial management and responding to client complaints. The proposed approach differs from ENEE's current loss-reduction measures, which are based upon detection and penalization o f fraud; while these measures may yield some short run benefits, they are neither efficient nor sustainable. The project would emphasize a strategy based upon remote metering for all large clients which has proved successful elsewhere and has been successfully applied to a limited extent inthe San Pedro Sula region inHonduras. 63, The project also includes rehabilitation o f the distributionnetworks and implementation o f new approaches for the execution o f the activities o f the commercial cycle (metering, billing and collection) and attention to customers' claims. Willingness o f customers to improve their payment behavior will not exist if they do not receive acceptable service. The new management procedures and techniques are supported by the incorporation of a Commercial Management System (CMS), and Incidence Recording and Management System (IRMS) and a Corporate Resources Management Information System (CRMIS). These are powerful tools that will allow ENEE to properly perform the main functions (operation and maintenance of electricity networks, commercial activities), handling the related information flow with high transparency. 19 As a consequence, will be governance substantially improved, as accountability can be actually implemented. 64. Evaluations o f staffing capacity concluded that there i s a group o f young middle management professionals with the necessary technical qualifications and potential to implement all the components o f the project and introduce a client-oriented culture with the support of external advisors. Furthermore, the proposed reorganization o f the distribution business calls for the creationof a new distributionand commercial management unit responsible for technical and commercial planning. To ensure the adequacy and appropriateness o f the capabilities o f the new distribution and commercial team, ENEE will use open, transparent and merit-based procedures to select and appoint, from its staff, qualified professionals that will manage the new units. The selection procedure will be conducted by a top international firm. 65. During project preparation, a governance assessment was carried out for ENEE with a view to identifying governance reforms to improve transparency and accountability of the utility, improve corporate governance and strengthen ENEE's capacity in fiduciary aspects o f its operations. A suite o f actions have been proposed and are to be implementedunder this project, under the PRSTAC or using ENEE's own resources. See Annex 12 for the results of the assessment and the proposed action plan. Q. Fiduciary 66. A financial management capacity assessment for both CPME and ENEEwas carried out in accordance with OP/BP 10.02 and applicable guidelines. On the basis of the assessments performed, the financial management team presents the following conclusions: (9 CPME has prior experience in managing fiduciary aspects o f Bank financed projects, specifically Credit 3939-HO and TF057803 which have Satisfactory FM ratings and has inplace a basic administrative structure and systems (FM and internal control system) in place, which puts it in a good position to manage the fiduciary aspects o f the project. (ii) The FMcapacity assessment (FMA)hasidentifiedproject-specific actions inorder to enable CPME to monitor the financial activities o f the project and carry out the financial activities o f the proposed project effectively. (iii) Itis important to notethat the project is expected to usecountry systems(SIAFIand when available, UEPEX) for accounting and reporting purposes, as these systems would provide adequate information for monitoring specific project expenditures. N o additional system is expected to be needed. In addition to the use o f country systems (SIAFI), the proposed project will also use the single treasury account to make project payments where appropriate. 67. A procurement capacity assessment of ENEE and CPME was carried out in late August 2008. The assessment reviewed the organizational structure and the capacity o f both institutions to carry out procurement activities. On the basis o f the findings it was concluded that CPME should be in charge o f procurement activities because conversely to ENEE, CPME has been involved in Bank-financed project, i s staffed with qualified and experienced procurement 20 specialist who are familiar with the Bank's rules and has a simpler document flow system and a more flexible approval mechanism. CPME i s very familiar with SEPA, Bank procedures and standard bidding documents for the procurement o f goods and consulting services. R. Social 68. Poverty impacts. Poverty and inequity remain huge challenges in Honduras. 64 percent of the population was poor and 45 percent lived in extreme poverty in 2006. A factor influencing this situation is the lack of basic services such as electricity, which reduces the opportunities of growth. InHonduras the access to electricity service remains the lowest inCentral America, with an average coverage o f 69 percent in2006. However, the situation i s particularly bad inthe rural areas where the coverage i s 44 percent, lower than half the 96 percent existing in urban areas. Although the government offers a subsidy to residential users consuming less than 300kWh/month, only 14 percent o f the total subsidy benefited poor households,with average electricity consumption below 1OOkWWmonth in 2006. The proposed modernization o f the distribution and commercial functions will provide information systems upon which better targeting mechanisms could be built to mitigate negative impacts o f rising electricity costs on the poor. 69. Social Safeguards. The project will not trigger any o f the social safeguards (Indigenous Peoples OP/BP 4.10, Involuntary Resettlement OP/BP 4.12 or Physical Cultural Resources OP/BP 4.11). Proposed rehabilitation works under the project will not cause any physical impact causing resettlement or affecting cultural assets, as corroborated by the environmental assessment. Indigenous peoples communities, located mainly in the rural areas, might benefit from the rehabilitation of distribution networks at the Center-South and at the Atlantic Coast. 70. Communication, Outreach and Participation Program. Component 3 o f the project for strengthening ENEE's institutional capacity and corporate governance comprises a communication, outreach and participation subcomponent. This subcomponent has been designed in a participatory manner through stakeholder consultation carried out during project preparation to contribute to the following objectives: a. Complement the project's quality enhancement purposes through an outreach campaign with selected consumers to address some o fthe problems affecting ENEE: (i)inadequate attention to the commercialization functions and poor customer services; (ii)illegal connections and electricity theft; and (iii) inadequate payment collection. b. Improve the ENEE-consumer communication interface by establishing information channels to receive feed-back, share responsibilities and improve transparency. c. Strengthen the areas in ENEE linked to customer service, to speed their response and train staff to adopt the new customer service systems. This subcomponent will carry out three main activities: a. Outreach to and consumers'participation. Through this program, ENEE will interact directly with selected users to reach agreements to save energy, particularly during peak- hours, and seek their help to reduce electricity thefts and illegal connections, both linked 21 to ENEE's commitments to quality standards and incentives. Specific agreements will be reached with: (i) community users in selected areas; (ii)large users in strategic sectors; and (iii)priority municipalities: It will also comprise an education campaign to promote a better use o f electricity and reduce household losses. b. Communication and transparency: This program will renew communication procedures establishing quality standards and an information system that will enable users to monitor and provide feedback on ENEE's performance. This component will help to improve transparency through: (i)public quality indexes and satisfaction surveys; (ii) integrated consumer attention systems; (iii)public relations and information systems; and (iv) communication campaigns to (a) present best results and improvements in quality and (b) raise public awareness about the role o f ENEE to gain support from consumers and improve its image. c. Institutional strengthening: This program aims at achieving better coordination among all areas in ENEE, both Central and Regional, in the area o f customer service. This program will include training and technical assistance. S. Environment 71. The project is expected to be largely beneficial to the environment, as improvements on continuity and reliability of service will reduce the need for individual generation units, which are often a major source o f air and noise pollution. The project has national coverage where electric services exist. The project i s not expected to produce major or irreversible environmental impacts. Electric distribution projects do not represent a threat to the environment, as i s the case for this project. The project will support identification, replacement and disposal o f equipment with PCBs, an activity that requires special environmental controls. It is estimated that the public electric distribution system in Honduras may have more than 500 units which have PCBs with concentrations above 50 parts per million (ppm) and thus require special environmental handling. ENEE has elaborated a "Plan for Replacement and Handling o f PCBs", which i s included in the "Environmental Guidelines for Distribution Projects" that is expected to be adopted by ENEE for all o f its distribution projects. In addition, the implementation of this project will also comply with "Environmental Guidelines for Minor Works". 72. ENEE's Plan for PCBs will adopt the international environmental guidelines following the Stockholm Convention for PCB disposal. It will also be included in Honduras's "National Plan for PCBs", currently under development by SERNA. ENEE's "Plan for Replacement and Handling of PCBs" includes the following activities: (i)completion of the inventory o f PCB containing equipment, (ii)identification o f sites contaminated with PCBs, (iii)purchase o f sampling equipment, (iv) provision o f information, capacity building and training for ENEE's employees, (v) verification that temporary storage o f PCB containing equipment is made following appropriate safety procedures, and (vi) final disposal o f PCB containing equipment according to international guidelines. A special commission will be created to oversee all the activities related to PCB management and disposal. 73. The project carries an environmental classification o f "B". Other safeguard issues (forests, involuntary resettlement, safety o f dams, pest management, natural habitats, project in disputed areas, physical cultural resources and project in international waterways) would not be triggered 22 by the proposed project. The environment assessment report has been released in-country and was filed inthe Infoshop inOctober 17,2008. T. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [ XI [I Natural Habitats (OP/BP 4.04) [I [X 1 Pest Management (OP 4.09) [I [XI Physical Cultural Resources (OP/BP 4.11) [I [XI Involuntary Resettlement(OP/BP 4.12) [I [ XI Indigenous Peoples (OP/BP 4.10) [I [X 1 Forests(OP/BP 4.36) [I [ XI Safety of Dams (OP/BP 4.37) [I [ XI Projects inDisputedAreas (OP/BP 7.60)* [I [X I Projects on International Waterways (OP/BP 7.50) [I [X 1 U. Governance 74. The Honduran electricity sector, the national electricity utility ENEE and this project face significant governance risks. The project aims to address key governance weaknesses both inthe project context and, in combination with other Bank programs, at the sector level. While this limited investment operation cannot address all governance issues, it will serve as one among several vehicles for a dialogue with the government. Such a dialogue will help introduce governance reforms within ENEE and in its relationship with other sectoral institutions and support interventions that will lead to long-term solutions in conjunction with other governance- related instruments/initiatives of the Bank, IMF, and other donors. 75. The Bank consulted with different stakeholders, including ENEE managers, labor unions, related government agencies, and the private sector, during the elaboration of the Honduras Power Sector Issues and Options study4and the preparation of this project. The governance challenges identified can be classified into the following types: (i)lack of transparency and accountability in decision-making, (ii)weak corporate governance, and (iii)low institutional capacity in fiduciary aspects of operations. The specific actions are grouped into three pillars: (i) enhancing transparency, performance accountability and attention to consumers, (ii)improving corporate governance, and (iii)strengthening the fiduciary capacity of ENEE inoperational areas. See details inAnnex 12. V. Policy Exceptions and Readiness 76. The proposed project would not require any exceptions from Bank policies and would comply with all applicable Bank policies. 77. The project meets the readiness criteria given that: 'Bysupportingtheproposedproject,theBankdoesnotintendtoprejudicethefinaldeterminationofthe parties'claimsonthe disputed areas 4 HondurasPower Sector Issues and Options, July 2007. 23 >>> AOP andprocurementplanare acceptableto the Bank. Implementationarrangementsare inplace. Key project staff inENEEandCPMEwill behiredby the effective date. P Subsidiary Agreement will be signedby the effectivedate 24 Fernando Lecaros Senior Energy Specialist, LCSEG Philippe C&&-lesBenoit Sector Manager, LCSEG Laura Frigenti Country Director, LCC2C 25 Annex 1: Summary Background of the Electricity Sector HONDURAS: Power Sector Efficiency Enhancement Project A. Diagnostic of the Electricity Sector 1, The electricity sector in Honduras is characterized by an incomplete attempt in the early 1990s to reform the sector, the dominance o f a vertically integrated state utility ENEE, an increasing share o f thermal generation over the past two decades, the poor financial health o f ENEE, hightechnical and commercial losses in transmission, and distribution and low electric coverage inrural areas. 2. ENEE, which was created in 1957,was boosted by the technical and financial support of the International Financial Institutions inits initial two and a halfdecades. Hydroelectric projects abounded and the transmission network expanded to incorporate all economically active areas o f the country into the national grid, which was interconnected with Nicaragua, Costa Rica and Panama. The largest project undertaken was the 300MW hydroelectric plant o f El Cajon, commissioned inthe mid-1980s. 3 . The electricity sector in Honduras suffered a severe financial crisis in the early 1990s when demand growth projections did not materialize, electricity tariffs were not adjusted to cover the debt services o f the El Cajcin hydroelectric project, and ENEE's performance was poor (electricity losses o f about 28 percent, overstaffing, and poor maintenance o f thermal plants). The financial crisis led to the energy crisis of 1993 when a severe drought coincided with a lack o f generation reserve capacity. There was an urgent needto mobilize private financing to expand generation capacity and to improve ENEE's performance. 4. The response to this crisis was the sector reform o f 1994, based on a new Electricity Law that established a competitive power market (vertical unbundling, freedom o f entry to all sector activities, open access to transmission and distribution networks, and freedom o f choice for large users). It included the separation o f the roles o f policymaking, regulation, and provision o f electricity services; the application o f cost-recovery tariffs and targeted subsidies; and the private provision o f electricity services. 5. The new market model, and the underlying assumptions made by the reformers, proved to be too ambitious for Honduras, with a small power system, a tradition o f political clientelism, and weak institutions. First, the competitive market envisioned in the law was not implemented because the distribution networks were not unbundled and privatized, and ENEE continued operating as a vertically integrated state-owned enterprise and as de facto single buyer, responsible for procuring all the new energy required to meet demand. Second, the separation of the roles of the government was not effective: SERNA and the Energy Cabinet (an inter-agency structure chaired by the Minister o f Presidency with SERNA as its Secretary) lacked the technical support and expertise to conduct energy planning and policymaking, and ENEE continued to play a major role in these activities. The new regulator, the National Energy Commission (CNE), had a marginal role due both to a lack o f political support to implement the new regulations, and to its lack o f resources and ENEE's dominant role in the sector. Third, the 26 principleso f cost covering tariffs andtargeted subsidies were not implemented due to inadequate political commitment, but also because o f the dependency on imported oil for power generation, which resultedinhighand volatile generation prices that were not passed on to retail tariffs. 6. The defacto single-buyer model has been successful in attracting private investment to expand generation capacity based on long-term power purchase agreements (PPAs) with thermal generators and small renewable projects. The combination o f PPAs, backed by payment guarantees o f the government, and the selection o f diesel plants, with low capital costs and short construction periods, reduced the market and project risks for private investors. Since 1994, private developers have investedsome US$600 million in about 800MW o f medium speed diesel and gas turbine capacity. In addition, they have invested some US$70 million in 110 M W of small hydro and bagasse-fired capacity that benefited from fiscal and price incentives. Reliance on the private sector has thus become the norm for generation capacity expansion. 7. The hydro-dominated generation system o f the mid-1990s has been gradually converted to a thermo-dominated system as hydroelectric development became more expensive when funding through interest-free loans from International Financial Institutions was cut and private investors perceived lower risks and shorter maturities in thermal generation projects. Honduras now depends on imported fuels for 63 percent o f its power generation (almost all thermal generation under PPAs). The cost o f energy purchases and fuel expenses doubled from 2001 to 2006, due to a higher share o f thermal generation and the steep increase in heavy fuel oil prices. ENEE's revenues, eroded by highnontechnical losses, could not cover the increases incosts. 8. ENEE had to rely on emergency generation to meet demand during 2001-04 due to delays in procuring new generation capacity. About 180 M W in skid-mounted diesel generators were leased in 2002-04 to meet an energy shortfall in the period before 410 M W in new PPAs were commissioned. In 2007 the supply/demand balance was again tight, with a capacity reserve o f only about 5 percent. 9. Installed generation capacity in 2007 was 1,548 MW, 63 percent o f which i s thermal- based. Heavy fuel oil accounts for 56 percent o f the capacity, hydroelectricity for 33 percent, diesel generators for 6 percent and biomass systems for 5 percent. However, due to seasonality (Le. the natural uncertainty affecting hydroelectric generation), the old age o f some o f the thermal plants, and mothballing o f thermal capacity, firm generation capacity i s substantially lower than installed capacity. 10. ENEE's performance is still poor. Electricity losses increased during2001-06 from about 20 percent to 25 percent, mostly related to theft, fraud, and illegal connections. The expectation of a future restructuring and privatization postponed needed actions to improve ENEE's corporate governance and modernize its information systems and commercial practices. B. The EmergingEnergy Crisis 11. Needed investments in generation and transmissions have long been delayed. This in conjunction with the high system losses discussed above make an energy crisis looming. The new generation capacity, which i s planned to be commissioned in 2007-10 (about 150 MW, 27 mainly in renewable power) i s not sufficient to meet demand growth (for the period 2006-2010, the expected annual rate of growth of energy demand is expected to be around 6 percent, while peak demand could increase at around 7 percent). A capacity shortfall o f about 70 MW was estimated for 2008, which would increase to 275 MW by 2010. Considering that no new power has been contracted, and that development o f new generation projects would take about three years, it i s likely that Honduras would have to rely again on expensive emergency generation to meet demand during 2007-10. Although the need for new generation capacity by 2009 was anticipated two years ago, the development o f the required generation projects has been delayed due to a slow decision process. 12. There is a large backlog o f transmission and sub-transmission investments that could not be implemented as planned due to financial constraints. ENEE had to install expensive diesel generation in some congested industrial areas in the north and downgrade the transmission planning reliability criteria. Further delays in strengthening the transmission networks will increase the probability of blackouts, operating costs, and electricity losses, and worsen the quality o f service. C. ENEE's FinancialCrisis 13. ENEE has beenincurring annual financial losses o f about 2.5 billion lempira (equivalent to almost 2 percent o f Honduras's GDP). Its internal cash generation has been negative; ENEE has had to postpone needed investment in distribution and transmission and to finance the shortfall with expensive revolving loans from local banks and credits from thermal generators on the payment o f energy purchases that amounted to 2.3 billion lempira in 2003-05. Debt service coverage and contribution to investmentshave been negative during the past five years. 14. The financial crisis can be explained by a combination o f factors: (a) poor performance (high electricity system losses, mainly due to theft, fraud, and illegal connections); (b) the vulnerability o f generation costs o f a thennal-based power system to high and volatile international oil prices; (c) high costs o f the long-term PPAs contracted in the 1990s, which reflect high market risks and expensive emergency solutions; and (d) an average electricity tariff that i s below the efficient supply costs. 15. The government's direct contribution to the alleviation of ENEE's financial crisis during 2001-05 was moderate. The net direct contribution, estimated at about 1 billion lempira, was mostly for rural electrification projects. In addition, the government has paid about 1.4 billion lempira in direct tariff subsidies to residential consumers. However, ENEE's annual financial losses during 2002-06 are a more appropriate reflection o f the economic cost, because they reveal the huge need for investments in the sector, the alarming cash-flow position, and the structural imbalances between costs and revenues. 16. A business-as-usual scenario-no actions taken to reduce commercial losses and to reduce electricity subsidies-is not sustainable inthe short term. The operating revenueswill not be sufficient to cover the fuel and power purchases, and by 2010 the financial loss i s expected to increase to 4.4 billion lempira and the cash-flow deficit to 3.9 billion lempira. There i s no fiscal space to finance the deficit, and Honduras could face a severe energy crisis. 28 D.InstitutionalInstabilityandWeak Governance 17. ENEE was created as an autonomous state organization responsible for the production, transmission, distribution and commercialization o f electrical energy. However, as a growing source o f jobs and a conduit for large financial flows to and from the state and other private actors, it did not remain autonomous or keep its professional management orientation for very long. Political interference, as well as characteristics o f Honduras' broader institutional environment, contributed to the repeated crises the electricity sector has experienced since the early 1990s in respect to its financial sustainability and the supply o f adequate levels o f power to meetgrowing demand. 18. In addition, management positions have typically been occupied by individuals without the specified qualifications and have been subject to highrates o fturnover. Political leaders have used these positions to reward key supporters and/or to gain leverage in ENEE. Two months into the third year o f President Zelaya's four-year term, ENEE has had six different managers, including, for a short while, the President himself. 19. The impact o f the broad features of the policy making process, including clientelistic practices, low investments in institutional capacity, frequent rotation and politicized appointments o f management personnel, and the weak policy making and control capacity o f congress, also contributed to the weak role in sectoral policy formation assumed by the Environment and Natural Resources Secretariat (SERNA) and the politicization o f the regulatory body CNE created as a dependency o f the former under a 1997 modification to the 1994 framework law. With this reform, executive influence over the regulatory agency was assured by the president's responsibility for appointing all o f the commissioners for the four-year administrative term. The lack o f political will to create a more robust regulatory commission was also reflected inits lack o f financial independence and its technical weakness. 20. The broader legal environment has also been deficient, given the absence of antitrust legislation and the judicial branch's ineffectiveness and lack o f independence from political and societal interests. In practical terms, the lack o f confidence in the institutional environment has constrained the possibilities for a deeper reform o f the sector, such as through the privatization o f distribution and transmission, and limited the efficiency and competitiveness o f bidding processes associated with the purchasing o f power generation and the reliable application o f sector regulations. E.PoorManagementSystems 21. Corporate resources management systems as well as customer and incidence- management information systems inENEE are largely inadequate for the successful and efficient management o f a modern power sector. Systems are not integrated and most procedures are manual and information i s physically transferred on hard format (i.e. paper), which results in inefficiencies, duplication of tasks, delays, information misplacement and loss, need for continuous controls and reduced flexibility. 29 22. In the case of corporate resources, management has to rely on various independent processes for (i)accounting, (ii)tax payments, (iii)management o f inventories, (iv) asset management and (v) human resources management among other functions. All the processes are managed in isolation and do not allow for real-time updating, which requires the information systems department to perform monthly batch processes. 23. In addition, there is not a system in place that allows for an effective commercial management o f the company. ENEE relies on an outdated customer database and it i s not currently in a position to update it as most commercial functions are subcontracted to SEMEH. These circumstances are reflected in the fact that ENEE cannot effectively manage clients' request (e.g for new connections, metering replacement, etc.), monitor the company's activities inthe field, manage the commercial cycle or monitor its own energy balance, which are key for strategic planning. 24. Incidence management i s also handled manually. Emergency and incident coordination centers and field teams are understaffed and have to rely on outdated customer information and old equipment. As a result, prompt and accurate response to the bulk o f ENEE's customers' claims has become a challenge that hinders not only service quality but also ENEE's public image. F.Pricingand Subsidies 25. ENEE's tariffs have not reflected the economic costs of supply. Although average nominal tariffs increased by 52 percent between 2001 and 2006, when expressed in real terms they remainedpractically constant. The tariff analyses show that in 2007 ENEE's prices covered only 83 percent o f the economic cost o f supply and that the tariff structure was distorted with residential prices substantially below economic cost. The average tariff for the residential category was 60 percent o f the economic cost o f supply and only 54 percent after deducting the government's direct subsidy. 26. A subsidy was established in 1994 to compensate for any tariff increase to eligible residential users (Le. users consuming less than 300 kWh per month). However, the current cross-subsidy does not respect the caps and the surcharges to other consumer categories set by the Electricity Law. Subsidies have become poorly targeted and regressive, mostly benefiting non-poor consumers. This has resultedin one o f the lowest residential tariffs in the region which inturn has ledto very high average residentialconsumption, 200 kWhper month, almost double the average for El Salvador and Guatemala. 27. The government has recently taken actions to address the below-cost tariffs by applying a 34 percent average tariff increase (see Annex 1.1 for details). The 33.9 percent average adjustment for residential tariffs has been the highest when compared to other consumer categories (Le. commercial, industrial, government and municipal). 28. Along with the tariff increases, subsidies were also adjusted to favor the low consumption consumers. Residential consumers below 150 kWh receive full subsidy from the government. For other consumer categories, the impact o f the fuel adjustment is as follows: (i)151-300 kWh: 30 53 percent o f billed amount based on the tariff, (ii)301-500 kWh: 80 percent o f billed amount based on the tariff, (iii)above 500 kWh: 120 percent o f billed amount based on the tariff, and (iv) nonresidential consumers: 120percent of billed amount based on the tariff. G. Challenges 29. Inthe short term (2007-lo), the main challenges are to improve ENEE's critical financial situation and avoid the emergingenergy crisis. Substantial improvements inelectricity losses and electricity tariffs are required to reverse ENEE's financial losses. The analysis o f ENEE's financial projections shows that reducing electricity losses to about 16 percent in four years and aligning average tariffs with economic costs in about three years would produce a cumulative cash-flow surplus during this period. Progress made in taking effective measures to reduce electricity losses and to introduce cost-recovery tariffs and energy efficiency programs would also have a substantial impact on avoiding an energy crisis by reducing additional generation capacity requirements. 30. The loss-reduction program and tariff adjustments are necessary short-term options to improve ENEE's financial situation. However, it is unlikely that substantial and sustainable improvements in the performance o f ENEE can be achieved if its corporate governance i s not strengthened. This would be achieved through restructuring and the creation o f independent business units for generation, transmissioddispatch and distribution. Good performance is a necessary condition to ensure financial sustainability, because passing on to tariffs ENEE's inefficiencies or providing fiscal support are not valid options in this case. Credible and competent price regulation i s another necessary condition, 31. For the medium and long term, the four major challenges are: (a) ensuring the financial sustainability o f the sector, (b) mobilizing private finance to ensure a sustainable and reliable supply, (c) diversifying the energy sources, and (d) increasing access to electricity services for the poor. H.Government'sStrategy 32. Due to the difficult situation of ENEE, the government issued an Emergency Decree in June 2007 to take the necessary actions to ensure sustainable electricity supply, restore ENNE's financial health and strengthen the institutions o f the electricity sector. The core elements o f the government short-term strategy are the following: (a) tariff adjustment for a total o f 27 percent in 2008 to achieve operational breakeven o f ENEE, (b) strengthening ENEE's management, (c) approving and implementinga loss reduction program in distribution, and (d) injecting capital to ENEEto clear up arrears and ensure new investmentsto the sector. 33. In the short and medium term, the following major actions are planned and/or being implemented: Investments in maintenance and rehabilitation of generation plants, a contract for 250 MW of emergency thermal power, the development of 100 MW o f renewable- and bagasse- based new generation, and the implementation of a pilot efficient lighting program. 31 e Implementation of a loss reduction program, reducing the total loss from 20.7 percent in 2007 to 10 percent in 2013, and the nontechnical loss from approximately 12 percent to 2 percentby 2011. e Adjusting tariffs towards the recovery of the economic cost of supply and focusing subsidies to poor households. As the first step, effective in January 2008 and May 2009, the average tariff has been increased by 11 percent and 16 percent, respectively, through adjustments inthe fuel component of the tariff. e Improvingthe quality of electricity supply and customer services. Rehabilitating and strengtheningthe distribution networks. e Expanding the national electricity coverageto 79 percentby 2011. e Reducingnon-payment to 2 percent. e Strengthening ENEE management and restructuring ENEE through independent business units. e Strengthening the distribution business functions, including the establishment o f a central unit for distribution and commercialization. e Eliminatingthe operating cost deficit. e Reviewinghenegotiating the contract with SEMEH. e Improving ENEE's income sources. e Improvingtransparency and public access to information. e Rationalizing the allocation and use of humanresources. 34. Inthe longer term, the following major actions are planned: Investment in hydroelectric projects, transmission and distribution. The potential hydro projects include Patuca I11 (lOOMW), Tornillito (160 MW), Los Llanitos (98 MW), Jicatuyo (173 MW) and El Tablon (20MW), which are expected to come online in2013-2015. Promoting hydropower and other renewables to reverse the current thermal-dominated generationmix. Initiating a competitive process for purchasing renewable-basedelectricity. Implementing an energy efficiency program. Implementing other thermal projects to complement renewables and energy efficiency programs. Eliminating ENEE's deficit. 35. A multi-donor approach has been adopted to support the government in implementing this strategy. The donors have coordinated in order to convey common messages to the government and have assumed their respective roles under the aegis of a single sector strategy (see Section 1II.A on partnership arrangements). 36. Despite these measures, ENEE is expected to continue experiencing an operative deficit until 2012. Government support for transitional financing will be important while ENEE improves the quality of its services. 32 .e m 1 5 M 0 m m Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies HONDURAS: Power Sector Efficiency Enhancement Project Table 2.1. World Bank Group OngoingEnergy RelatedProjects inHonduras Project Project Name Amount Financier RelatedSector Issues IP/DO ID (US$ ratings million) PO86775 Rural 47.0 IDA Rural electrification, MU Infrastructure including both grid Project extension and off-grid amlications. PO90113 GEF Rural 2.35 GEF Rural electrification MU Electrification grant through off-grid applications. PO83851 Poverty Reduction 8.0 IDA Improve institutional MWMS SupportTechnical capacity o f public sector Assistance management, including SIAFI, restructuring o f ENEE, strengtheningthe regulatory capacity o f the Dower sector. etc. Table 2.2. World BankEnergy RelatedProjectsinHondurasCompletedwithin the Last FiveYears Project ProjectName Summary Sector ID Po97431 Petroleum Response to a request from the government Oil & Gas Exploration & for assistance inreviving the petroleum exploration activity Response to request by the government o f Energy and Honduras to assist inthe preparation o f a Mining power sector strategy to identify and address the main issues that, ifunresolved, risk derailing the macroeconomic framework, damaging the competitiveness o f the country and its prospects for poverty reduction 34 Table 2.3. Energy-Related Projectsin Hondurasby Other Agencies Project Name Amount Donor Agency Summary (US% million) Rehabilitationofthe Coyolar Enmienda416 Rehabilitationofthe Coyolar dam to avoid flooding in Dam(SERNA) 25.4 Kuwait the downstream lands. Improveddistribution Provide electricity to 177 rural communities and of Electricity to Rural 7.65 Korean Export marginalurban areas in 12 out of the 18 departments in Areas (ENEE) Import Bank the countrv. Interconnected Electricity Systemfor Establish interconnectioninfrastructure(transmission the Central American 15.0 IDB lines in substation to enable energy exchanges amongthe Countries participants inthe Regional Electricity Market). (ENEE) The general objectiveofthis Project is to improve the livingconditionsofthe poorest populationand enhance Support to Rural the competitiveness of the Honduraneconomy. Specific Electrification(ENEE) 25.0 IDB objectives include improvementsin the sub-transmission systems. The objectiveofthis Project is to reducepoverty in rural Social Electrification areas by providing equitable, safe and sustainable Program ES-RP2002 12.716 electricity services and supporting employment (ENEE) CABEI generation. Social Electrification The objectiveof this Project is to reduce poverty in rural ProgramES-N98 areas by providing equitable, safe and sustainable AmpliacionNo. 2 CABEI electricity services and supporting employment (ENEE) generation. ~ NationalProgram for This program aims at providing electricity to an 1 Social Electrification additional200 communities or about 75,041 people, NDF-2000(ENEE) 10.0 incorporatingaround 14,431 new usersto the CABE1 InterconnectedNational System. ~ Supportto Rural Electrificationand the Nordic the Energy Sector 7.08 Development Support to the IDB projectfor rural electrification (ENEE) Fund(NDF). 35 Annex 3: ResultsFrameworkand Monitoring HONDURAS:Power Sector EfficiencyEnhancementProject ResultsFramework PDO ProjectOutcomeIndicators Use of ProjectOutcome Information Improving ENEE's a) Increase in CRI ineach o f the three GovernmentIENEE to operational and distributionregions by 10% assess the performance o f financial the distribution operations. performance, thus b) Decrease inSAID1and SAIFI annually This could result in contributing to the specific steps to strengthen sustainability of the its operations. electricity sector in Honduras, Intermediate IntermediateOutcomeIndicators Use ofIntermediate Outcomes OutcomeMonitoring Outcome 1: a) Number o f AMRs installed Identify changes needed in Improving ENEE's b) CMS, IRMSand CRMIS inplace project management , commercial c) Number o f customers in CMS and I R M S design, or implementation management. database o f all three project d) Number o f ENEEemployees trained to components use CMS, I R M S and CRMIS e) Number o f customer's claims related to billing Outcome 2: a) Number o ftransformers replaced Rehabilitating b) Numbero f PCB-containing equipment distribution networks identified c) Number o f PCB-containing equipment replaced d) Number o fheavy vehicles acquired Outcome 3: a) Setup and operation o f separate business Strengthening units ENEE's institutional b) Setup and operation ofthe Distribution capacity and Commercialization Unit c) Competitive selection o f key personnel inthe distribution and commercialization unit, including 3 managers (Manager ofthe Distribution and Commercial Unit, Manager o f Planning and Distribution Engineering, and Manager o f Planning and Commercial Management) and 10other key staff d) Consumer satisfaction andperception 36 Arrangementsfor resultsmonitoring Institutional issues: See description o f the project (Main document: Section 3) and institutional arrangement sections (Main document: Section 2) for a description on how the results and outcomes will be monitored. Data collection: Periodic reports from the CPME and ENEE teams, periodic surveys, and punctual external verification will provide the data needed for measuring project results and outcomes (see the table below). Responsibilities and costing o f these different activities have been presented in detail under the description o f the Project (See Main Text, section 3, and Annex 4) and the corresponding cost table (Annex 5). Capacitv: CPME will have the responsibility to coordinate M&E related matters with technical inputs from the ENEE team. The performance indicators for the commercial operations will be available as output of the information systems to be implemented under this project. Technical assistance will be provided under this project to carry out surveys among customers in the project areas, large consumers in the country and ENEE's employees under the supervision of the CPME and the guidance o f the ENEE team (integrated in the communication and participation subcomponent). The WB supervision team will be available throughout the project implementation to provide assistance. Finally, data collection will be facilitated by the implementation o f commercial management system and the build up o f a customer database, Training will be provided for ENEE employees to collect the data and learn how to properly use the database. 37 W j: W Y zi $ 6 I 00 m -H a * 5 0 $ Lo E 3 Io I A A D x Dx x x P D x 9 B -0 5E B B 5E 2'E 5E 2'E .-3 E D D P D P m m a a a gez$ m E, 2,62 sw $ez8 E, 2ez% * w 62 d w s w ez d w d W .-E a, -x m Y 6 d, 4E 3 L3 3 10 2 8 - % 2u 8c 3 0 N 2 2 n IS > Annex 4: Detailed ProjectDescription HONDURAS: Power Sector EfficiencyEnhancementProject 1. The proposed project is a management-oriented initiative which seeks to professionalize ENEE's commercial and distribution operations and to improve the quality o f energy services to its clients through three components: (i)improving ENEE's commercial and corporate resource management, (ii)rehabilitating distribution networks, and (iii)strengthening ENEE`s institutional capacity and corporate governance. Component 1: ImprovingENEE's commercialand corporateresource management(Total: US$ 18.5 million,IDA: US$ 16.1million) 2. The objective of this component is to improve the commercial performance of ENEEin a sustainable manner by providing the company with the information tools for a modern and efficient management o f its customers and o f the services it provides. New operational procedures for a more customer oriented approach in the execution o f activities using these new tools will also be developed, and ENEE's employees will be periodically trained inthe use o f the system and in the utilization o f the new procedures. The project will also finance technical assistance to guide ENEE in how to build the corresponding reliable databases. ENEE will refurbishsome of its existing office space to house the hardware necessary to the operation ofthe CMS, the IRMS, and the CRMIS, as well as the call centers. 3. Subcomponent 1.1.: Installing automated meter reading (AMR) equipment (IDA: US$ 4.2 million) The objective of this subcomponent is to reduce, in a sustainable way, nontechnical losses in the services to ENEE's large customers through the installation o f Automated Meter Reading (AMR) equipment that allows remote metering o f consumption and disconnection or reconnection o f the clients. This subcomponent includes two activities: (i) complete the ongoing effort to install AMR systems for the existing 1,800 customers in the "Industrial" and "High Consumption" categories in the whole country; and (ii)extend the installation o f AMR to low voltage customers (residential and commercial), starting with customers with a monthly consumption above 400 kWh. 4. Subcomponent 1.2.: Installing a new automated commercial management system (CMS) (IDA: US$ 6.7 million). This project will finance: (i) a new CMS, (ii) creation and the maintenance o f a constantly updated and reliable customer database, and (iii)the creation o f a call center. The new CMS would allow: (i)on-line management o f the client database; (ii) effective management o f service orders, including registration o f all the activities performed at the client's residence (e.g. service interruption, reconnection, metering replacement and new connections); (iii)follow-up on each request for new connections, including differential response according to the specific characteristics o f each request; (iii)attention of customers at customer service centers or by phone (call center); (iv) automatic daily monitoring o f the company's activities in the field; (v) management o f the commercial cycle (Le. meter reading, billing and payment), including detection of billing errors on the basis o f certain pre-defined parameters, automatic management o f delinquent account conditions and fraudulent behavior and o f associated service interruptions and punitive actions; and (vi) monitoring o f ENEE's energy balance, including evolution o f losses and related strategic planning. This automated system will 40 be available in all the customer service centers and its design will be such that it allows for a quick and efficient response to the clients' requests (e.g. general and account information requests, contracting, service requests, claims, etc.). 5. Subcomponent 1.3.: Implementingan incidence recording and management system (IRMS) (IDA: US$ 3.1 million). This component will enable ENEE to better respond to client contingencies by automating the detection o f distribution faults and ensuring the quality o f power supply. The system will allow for a centralized and reliable management o f customers' claims, 24 hours a day, every day. This IRMS, integrated with the CMS, will help minimize the time elapsed betweenreception of a claim and restoration o f regular electricity supply, which is the critical parameter defining quality of electricity supply. The project will supportthis process through three activities: (i)the acquisition and implementation o f an incidents-recording and management system (IRMS), (ii)the creation of three distribution operation centers in Tegucigalpa, San Pedro Sula and L a Ceiba, and (iii) building o f a Installations and Supply the Database (ISD), which will include data on medium-voltage networks and on each customer's connection to the corresponding transformation station. 6. Subcomponent 1.4.: Developing a corporate resources management information system for the entire ENEE (CRMIS) (IDA: US$ 2.1 million). This component will complement the CMS by integrating the management o f all the processes and resources o f the company under a single technological platform that eliminates erratic processes, minimizes the use o f paper, and eliminates unnecessary efforts. The system will create interfaces with the relevant modules o f the existing Integrated Financial Management System (Sistema Integrado de Administracion Financiera or SIAFI). SIAFI i s being usedby all the Ministries and state owned enterprises as part o f the government's effort to centralize treasury and accounting management from public entities. Development of this system will also take into account the proposed institutional restructuring efforts to create separate business units in ENEE (See Subcomponent 3.1). 7. The CRMIS will include specific modules for: (i)accounting and finance, (ii)integrated human resources management, (iii)purchases and contracts, (iv) logistics, (v) asset management, (vi) corporate planning, and (vii) regulation, It is expected that, in the future, this system will also incorporate modules for (viii) investmentproject management and (ix) network maintenance management. Component2: Rehabilitatingdistributionnetworks (Total:US$ 14.6 million, IDA: US$ 7.4 million) 8. This component aims to improve the reliability and reduce technical losses in ENEE's distribution systems by strengthening the distribution grid, substations, and distribution equipment for supervisory control, voltage control and switching. 9. This component covers three distribution sub-regions: (i) Center-South, (ii)North-West and (iii)Atlantic Coast, and involves a total cost o f US$14.2 million. This project component will primarily focus on the following activities: (i)replacement o f transformers, purchase o f related distribution equipment, identification and replacement o f PCB-containing equipment and 41 disposal of PCBs; and (ii) purchase of maintenanceequipment, mainly heavy vehicles. Giventhe limited IDA resources, this project is not able to meet the total financing needs for rehabilitating the distribution networks. As additional resources are made available from IDA, CABEI, the government or ENEE, they will be directed for this purpose. This phased approach is feasible since most of the investments are for operation and maintenance purpose. However, any new activities other than the two describedabove under this component would require an amendment the Financing Agreement. 10. The project will support the implementation of some of these activities laid out ENEE's "Plan for Replacement and Handlingof PCBs", as they are related to the worn-out equipment to be replaced under this project. The Plan includes the following activities: (i)completion of the inventory of PCB containing equipment, (ii) identification of sites contaminated with PCBs, (iii) purchase of sampling equipment, (iv) provision of information, capacity building and training for ENEE's employees, (v) verification that temporary storage of PCB containing equipment is made following appropriate safety procedures, and (vi) final disposal of PCB containing equipment according to international guidelines. The implementation of these activities i s expected to go beyond the life of this project. Component3: StrengtheningENEE`s institutionalcapacity and corporategovernance (Total: US$6.2 million,IDA: US$3.5 million) 11. The objective of this component is to strengthen the institutional capacity and corporate governance in ENEE to ensure smooth implementation of this project and sustainability of project outcomes. 12. Subcomponent 3.1.: StrengtheningPower Sector Governance(IDA: US$0.8 million). The project will facilitate the implementation and monitoring of the power sector governance action plan as laid out in Annex 12. This action plan will operate along 3 pillars: (i)enhancing transparency, accountability and attention to consumers; (ii)improving corporate governance; and (iii)strengtheningthe fiduciary aspects of ENEE's operations. 13. Under Pillar I:(i)supporting ENEEto comply with the Transparency Law, (ii)carrying out external audits of ENEE, and (iii)establishing a transparent mechanism for monitoring the implementation of the recommendations from external audits; (iii)assisting UNAT in establishing a credible process to monitor ENEE's performance and making public the progress reports; (iv) supporting CNE to develop and implement standards for service provision by ENEE. 14. Under Pillar 11: (i)supporting dialogue among stakeholders on corporate governance and providing technical assistance to ENEE to define roles and responsibilities for the Board of Directors and the General Manager, (ii)putting in place a new distribution and commercial management team by establishing a central distribution unit, and (iii)developing and implementing the "Strategic Plan for Professionalization o f the Civil Service". 15. A central part of Pillar I1involves the virtual unbundling of ENEE's businessunitswith a view to improving the transparency and efficiency of its operations. A consulting firm is being 42 hired to carry out the design and implementation of the virtual unbundling using the PRSTAC funds. Pillar I1will also entail putting in place a new distribution and commercial management unit. The reconfigured unit is set out in Annex 4.2. This activity aims to strengthen ENEE's distribution planning, commercial and distribution operation functions by supporting the creation o f a new central distribution unit headed by a distribution and commercial operations manager. The proposed central unit is composed o f the three existing regional operations and two new functional units: one for distribution planning and one for commercial management. The key personnel required for the central distribution unit will be selected internally from ENEE in a transparent, competitive manner. 16. Under Pillar 111: (i)assessing results achieved through SEMEH's contract and assisting ENEE to carry out an international bidding process to contract out those commercial functions for which ENEE does not have enough resources; (ii)reviewing ENEE's practices and procedures for contracting with private providers o f power; (iii)strengthening ENEE's capacity in developing technical/engineering specifications for power generation, conducting economic and financial evaluation o f proposals and negotiating PPA contracts. 17. Specific activities are set out in Annex 12, as well as below under Components 3.3 and 3.4. In addition, the activities under Component 3.3 designed to improve payments by users o f electricity will also support greater governance. 18. Subcomponent 3.2.: Analyzing the long-term financial sustainability of ENEE and developinga strategyfor commercialoperations(IDA: US$ 0.5 million). The purpose ofthis subcomponent i s to examine the long-term financial sustainability o f ENEE, including, but not limited to a sounder and more sustainable tariff and subsidy structure and the development o f a strategy and business plan for the new distribution and commercialization unit. 19. Subcomponent 3.3.: Implementing a communication, outreach and participation program (IDA: US$ 0.7 million). The design of this subcomponent took into account international experiences o f similar projects and consultation with main stakeholders carried out during project preparation. The main objectives o f this subcomponent are: (a) to complement the project's quality enhancement purposes through an outreach campaign with selected consumers in order address the following issues: (i)inadequate attention to commercialization and poor customer service; (ii)illegal connections and electricity theft; and (iii)reduced payment collection; (b) to improve the ENEE-consumer communication interface establishing information channels to provide information and receive feed-back, share responsibilities and improve transparency; and (c) to strengthen the areas with customer service responsibilities in ENEE, to speed their response, and train staff to adopt the new customer service systems. 20. This subcomponent will carry out three main activities: i) Outreachtoconsumersandconsumers'participation.Throughthisprogram, ENEEwill interact directly with selected users to reach agreements to save energy, particularly during peak-hours, and seek their help to reduce electricity theft and illegal connections, both linked to ENEE's commitments to quality standards and incentives. Specific agreements will be reached with: (a) community users in selected areas; (b) large users in 43 strategic sectors; and (c) priority municipalities. It will also comprise an education campaignto promote a better use o f electricity and reduce household losses. ii)Communicationandtransparency:Thisprogramwillrenewcommunicationprocedures establishing quality standards and an information system that will enable users to monitor and provide feedback on ENEE's performance. This program will help improve transparency through: (a) public quality indexes and satisfaction surveys; (b) integrated consumer attention systems; (c) public relations and information systems; and (d) communication campaigns to present best results and improvements in quality and raise public awareness about the role of ENEEto gain support from consumers and improve its image. iii)Institutionalstrengthening:Thisprogramaimsatachievingbettercoordinationamongall areas inENEE, both Central and Regional, in the area o f customer service. This program will include training and technical assistance. 21. Subcomponent 3.4.: Project management, monitoring and evaluation, and audits (IDA: US$ 1.5 million) Under this subcomponent, the project will finance expenditures for project administration by ENEE and the PCU/CPME. Eligible expenditures include: (i)studies and consultancies, (ii)training activities, (iii)operating costs, and (iv) acquisition o f goods and equipments (computers, programs, etc.) as well as renovation of office spaces neededfor project implementation. ENEE will contribute to this component by providing logistical support, including: facilities and their maintenance, payment o f salaries to the PCU-ENEE staff working on the project, etc. This component will also finance monitoring and evaluation activities and audits. 44 n I/ 7- x CJ E I I i I i I I I I I I I I I I I I I I I I I 1 I I 1 I i i I I 1 I I i I -----I I I------ I I i a.. I I I I I I I i I I I i I i i I I i I I I I I I i 1 Figure 2. Sisterna Regional Sisterna Regional Sisterna Regional Figure 3. Desarrollo de Redes Sisternas y Mantenirnientode Operac16nde redes Planificacion y Procedlrnientos redes estudios Figure 4. 1 ' Sisternas y 1 Control Ciclo Proedirneintos Cornercial Comercial Cornercial I il I Facturacion Call Center consumos 46 Annex 5: Project Costs HONDURAS: Power Sector Efficiency Enhancement Project Activities IDA ENEE Total 1.Improving ENEE's commercialand corporate management 16,1 2.4 18.5 " 1,l Installingautomatedmeter reading equipment 3.1 Strengtheningpower sector governance 0.8 1.o 1.8 3.2 Analyzing the long-term financial sustainability of ENEE and developing a strategy 0.5 0.5 for commercial operations 3.3 Implementing a communication, outreachand 0.7 0.7 1.4 participationprogram 3.4 Project management, monitoring and evaluation. and audits 1.5 1.o 2.5 Total Baseline Cost 27.0 12.3 39.3 Physical Contingencies (5%) 1.5 1.5 Price Contingencies (5%) 1.5 1.5 Total Project Cost 30.0 12.3 42.3 *Cost estimates include taxes. 47 Annex 6: ImplementationArrangements HONDURAS:Power Sector EfficiencyEnhancementProject 1. The Republic o f Honduras will be the recipient o f the IDA credit. CPME will be responsible for overall coordination and fiduciary matters while ENEE will implement the proposed project activities. 2. The project execution unit that was created in ENEE to implement the IDB transmission project will have the responsibility and leadership for the technical content of this project in coordination with the relevant departments of ENEE and CPME. A project coordinator will be appointed within this unit and will have the necessary authority to convene ENEE's sub-management units, including three distribution sub- regional units, and other institutions as needed. The ENEE technical team for implementing the project should consist of, at a minimum, a project coordinator, an engineer, a FM/procurement liaison and an administrative assistant. These key personnel shall be inplace before the project effectiveness. 3. Project implementation will affect most o f ENEE's operations, not just its distribution and commercialization unit. To ensure coordination and engagement o f all the departmentshnits involved, a Steering Committee composed o f members from ENEE, CPME and Ministry o f Finance will be established and meet regularly to provide guidance on project execution. 4. CPME shall be equipped with adequate procurement and financial management capacity and will work closely with ENEE throughout the implementation o f the project. The team in CPME dedicated to this project shall be composed of, at a minimum, an energy sector specialist, a procurement specialist, a financial management specialist and a monitoring and evaluation specialist, and will be responsible for the management of the funds and the compliance of all project transactions with the procurement and financial management guidelines of the Bank. CPME will also have the responsibility to prepare all the progress report and to provide support to the ENEEteam to ensure that any project documents elaborated by ENEE comply with the Bank guidelines and the requirements stated in the Operations Manual o f the Project. Given its coordination and fiduciary responsibilities, the team at CPME will report to the General Director o f CPME. CPME will sign contracts with contractors under the project. 5. The project personnel in ENEE and CPME shall be hired based on terms o f reference agreed upon with the Bank and shall only be replaced for reasons related to performance. 6. The main functions and responsibilities of ENEEand CPME are listed below: 48 ENEE: Receives benefits from the IDA credit through a subsidiary agreement signed with the representative agency of the Republic of Honduras, and subject to the terms of the Financing Agreement signed betweenthe Bank and the Republic o f Honduras. Complies with all functions and responsibilities as the project's technical implementing agency Implementsproposed project activities directly and supervises the execution o f contracts 8 Contributes to the preparation o f the project Operations Manual and updating o f the manual as needed Provides inputsto the preparation o f project progress reports CPME: Prepares all procurement documents incoordination with ENEE Follows up on all procurement processes (bid announcements, reception of bids, bids evaluation and recommendations for award, and preparation o f draft contracts) with the participationof ENEE,up to the signing ofthe contracts. Prepares required project progress reports with necessary technical inputs from ENEE Establishes and maintains the required financial management systems, including the hiring of financial and audit staff, flow o f funds, accounting records based on generally accepted principles and practices, budget coding to allow the monitoring o f financial, administrative and functional aspects o f the project, preparation and submittal o f routine and annual financial reports and statements, to allow external auditing o f project as per international practices. Reports to SEFIN on project execution and implementation as needed and compliance with the conditions agreed with the Bank. 49 Annex 7: FinancialManagementandDisbursementArrangements HONDURAS:Power Sector EfficiencyEnhancementProject 1.Summary Conclusionof FinancialManagementAssessment 1. The approach taken to implement this project is as follows: a) ENEE will be responsible for the technical content o f the project through the existing project implementation unit, and b) CPME will be responsible for procurement and financial management which will facilitate timely execution and full compliance with the Bank rules without imposing excessive burdenon the limited administrative capacity o f ENEE. The use of CPME for FM-related matters is relevant as CPME has prior experience in managing fiduciary aspects o f Bank financed projects, specifically Credit 3939-HO and TF057803 which have Satisfactory FM ratings. ENEE will be the entity responsible for project implementation but will work closely with CPME. CPME will be directly in charge o f FM tasks for all the components o f the proposed project and will manage the Designated Account. 2. On the basis o f the assessments performed, the financial management team presents the following conclusions: CPME has prior experience with managing fiduciary aspects o f Bank financed projects (including credit 3939-HO and TF057803 for the preparation o f this project) and has in place a basic administrative structure and systems (FM and internal control system) in place, which puts it in a good position to manage the fiduciary aspects o f the project. The FM capacity assessment (FMA) has identified project-specific actions in order to enable the PCU in CPME to monitor the financial activities o f the project and carry out the financial activities o f the proposed project effectively. It is important to note that the project is expected to use country systems (SIAFI and UEPEX) for accounting and reporting purposes, as these systems would provide adequate information for monitoring specific project expenditures. No additional system i s expected to be needed. In addition to the use o f country systems (SIAFI), the proposed project will also use the single treasury account to make project payments. 2. OrganizationalArrangementsand Staffing 2. The overarching approach to project implementation would be to use existing capacity in the Honduran institutions involved, rather than creating new Project Implementation Units. Additionally, the implementation arrangements would warrant a sound project governance structure with checks and balances included in various areas. For these reasons, the approach taken to implement this project i s as follows: a) ENEE will be responsible for the technical content o f the project through the existing project implementation unit with support from the central commercial and distribution unit to be 50 established under the project, and b) CPME will be responsible for procurement and financial management which will facilitate timely execution and full compliance with the Bank rules without imposing excessive burden on the limited administrative capacity o f ENEE. The use of CPME for FM-related matters is relevant as CPME has prior experience with managing fiduciary aspects o f Bank financed projects (including credit 3939-HO and TF057803 for the preparation o f this project). 3. CPME will be directly in charge of financial management (FM) tasks. These will basically include: (i)budget formulation and monitoring; (ii)cash flow management (including processing payments and submitting loan withdrawal applications to the Bank); (iii)maintenance o f accounting records, (iv) preparation o f in-year and year-end financial reports, (v) administration o f underlyinginformation systems, and (vi) arranging for execution o f external audit. In addition, CPME will be responsible for implementing the governance and transparency aspects of the overall project, including monitoring the good governance mechanisms implemented in the implementation agency and the appropriate information management system to guarantee transparency in each o f the processes implemented according to the Ley de Transparencia y Acceso a la Informacidn Pziblica. 4. CPME was created to administer various projects including IDA 3939-HO and TF 057803 for the preparation o f this project. Therefore, the unit already has the capacity necessary to administer the financial aspects o f the proposed project, including a basic administrative structure and FM systems inplace. Under this arrangement, ENEE will be responsible for the technical content o f the project, while CPME will be responsible for the flow of funds, procurement of works, goods and services, making project payments, financial reporting, and other related fiduciary activities. CPME will carry out its functions with its existing staff and be requiredto maintain professional staff in numbers and with qualifications and experience acceptable to the Bank according to the Project's Operational Manual. However, since CPME will continue to administer other projects, it i s expected that one additional accounting professional will be necessary within CPME to carry out the increased workload generated by the project. This additional person would be financed from the resources of the project. 3. BudgetPlanning 5. Between April and May o f each year, CPME will prepare its tentative investment program for the next year (including the investment program for the proposed project) and submit it to SEFIN for review and approval. The program should be consistent with the budget policy provided by the SEFIN, and be incorporated into the national budget for its submittal to Congress in September. 6. On the basis o f the approved budget, CPME, in coordination with ENEE will adjust as needed the annual operations plan (AOP) and procurement plan, which will be reviewed by the WB. 4. Accountingand FinancialReporting 51 7. Accounting Policies and Procedures. The main FM regulatory framework for the project will consist o f (i)Honduras' laws governing budget management; (ii)SEFIN's operating manuals; and (iii) Unit's operating norms. the 8. These documents will be complemented by project-specific FM arrangements documented in a concise FM section o f the project's operational manual. Among others, specific reference will be made to: (i)the internal controls appropriate for the project; (ii) the formats o f project financial reports, and (iii) auditing arrangements. 9. Information Systems.The proposed project will utilize country systems for accounting and financial reporting. The financial activities o f the project (especially budgeting and budget execution) will be recorded in SIAFI. In addition, to meet the reporting requirements o f the proposed project, the PCU will use UEPEX, which i s a module o f SIAFI specifically designed for the accounting and reporting of externally-financed projects. The team will continue to work with SEFIN to ensure the proper implementationand operation o f UEPEX, when available, for the proposedproject. Inthe meantime, until UEPEX can be implemented (if it cannot be implemented prior to effectiveness), CPME would continue utilizing its existing integrated system (SIG) for the preparation o f financial reports. 10. Treasury System. It is important to note that with the use o f country systems (SIAFI) comes the use o f the single treasury account. As expenditures/commitmentsarise, they will be recorded inSIAFI, and once approved, funds will be converted into local currency by the National Treasury in the Ministry o f Finance (SEFIN) and channeled through the singletreasury account to make payments to suppliers, contractors or consultants. 11, Financial Reports. On a semester basis, CPME will prepare and submit to the WB an unaudited interim financial report (IFR) containing at least: (i)a statement o f sources and uses o f funds and cash balances (with expenditures classified by subcomponent); (ii)a statement o f budget execution per subcomponent (with expenditures classified by the major budgetary accounts). The interim reports will be submitted no later than 45 days after the end o f each semester. In this case, the IFRs are not expected to be utilized for disbursementpurposes (at least at the beginning). If at a later date, the IFRs are used for disbursement purposes, the following annexes would be required: (i)a Designated Account activity statement (including a copy o f the bank statement); (ii)a summary statement o f the Designated Account expenditures for contracts subject to prior review, and (iii)a summary statement o f Designated Account expenditures for contracts not subject to prior review. The IFRs will be part o f the project progress report, complementing other project information. 12. On an annual basis, CPME will prepare project financial statements including cumulative figures, for the year and as o f the end o f that year, o f the financial statements cited in the previous paragraph. The financial statements will also include explanatory notes in accordance with the Cash Basis International Public Sector Accounting Standard (IPSAS), and the CPME's assertion that loan funds were used in accordance with the 52 intendedpurposes as specified inthe Loan Agreement. These financial statements, once audited, will be submitted to the WB not later than six months after the end of the government's fiscal year (which equals the calendar year). 13. The supporting documentation o f the semester and annual financial statements will be maintained in the Unit's premises, and made easily accessible to WB supervision missions and to external auditors. 5. Flow of Funds 14. WB Disbursement Methods. Considering the results o f the assessments, the following disbursement methods may be used by CPME to withdraw funds from the credit: (a) reimbursement,(b) advance, and (c) direct payment. 15. WB Designated Account. Under the advance method and to facilitate project implementation, the PCU in CPME will have access to a Designated Account (DA) inUS dollars and maintained in Honduras's Central Bank (Banco Central de Honduras) in the name o f the project. Funds deposited into the DA as advances, would follow Bank's disbursement policies and procedures, as described in the Disbursement Letter and DisbursementGuidelines. 16. To make payments to contractors, providers and consultants for goods, works or services provided under the project, CPME will use SIAFI and make payments directly through the SIAFI system (as explained in the treasury systems section above). The Bank will obtain assertion from the government at negotiations that advances of funds from the DA to neither CPME nor ENEE will be allowed in the SIAFI (through issuingpayment orders, F01, to those institutions). 17. The ceiling for advances to be made into CPME's DA would be USD$ 3,000,000, estimated to be sufficient for project execution for a period o f 4 months. The reporting period to document eligible expenditures paid out o f the DA i s expected to be on a quarterly basis. 18. Supporting documentation for documenting project expenditures under advances and reimbursementmethods would be records evidencing eligible expenditures (e.g. copies of receipts, invoices) for payments for consultant services against contracts valued at USD$lOO,OOO or more for firms, and USD$50,000 or more for individuals; for payments for goods against contracts valued at USD$250,000 or more, for payments for works against contracts valued at USD$250,000 or more. For all other expenditures below these thresholds, supporting documentation for documenting project expenditures will be Statements o f Expenditures (SOEs). 19. All consolidated SOEs documentation will be maintained for post-review and audit purposes for up to one year after the final withdrawal from the credit account. 53 20. Direct Payments supporting documentation will consist o f records (e.g. copies of receipts, supplier/ contractors invoices). The minimum value for applications for direct payments and reimbursementswill be USD$300,000. 21. Retroactive financing will be available up to an amount o f USD$3,000,000 equivalent for eligible expenditures incurred and paid on or after November 1, 2008, but in no case more than one year from the date o f the Financing Agreement. 22. Disbursement Deadline Date: four months after the closing date specified in the Financing Agreement. 6. Audit Arrangements 23. Internal Audit. In the course o f its regular internal audit activities vis-a-vis the institutional budget, internal auditors for CPME or ENEE may include project activities intheir annual work plans. Ifsuch audits occur, CPME will provide the Bank with copies o f internal audit reports covering project activities and financial transactions. 24. External Audit. As stated earlier, CPME manages the Poverty Reduction Support Technical Assistance project (Credit 3939), for which no audit compliance issues have been identified, Overall, the audit reports for the fiscal years 2002 to 2006 for the above mentioned projects have been received on time and presented unqualified opinions (the 2006 audit report presented a minor qualification, which has been addressed). 25. The annual project financial statements prepared by CPME will be audited following International Standards on Auditing (ISA), by an independent firm and in accordance with terms o f reference (TORS),both acceptable to the Bank. The audit opinion covering project financial statements will contain a reference to the eligibility o f expenditures. 26. The audit work described above can be financed with credit proceeds. CPME will arrange for the first external audit within three months after Credit Effectiveness. Each audit engagement i s expected to cover at least two years. 27. In addition, memoranda on internal controls ("management letters") for the fiduciary activities o f the participating municipalities will be produced on a semi-annual basis, covering (i)weaknesses noted by the auditors in the internal control systems o f the project, (ii)cases o f application o f inappropriate accounting policies and practices, (iii) issues regarding general compliance with broad covenants, and (iv) any other matters that the auditors considers shouldbe brought to the attention ofthe borrower. 28.Disbursement Schedule i s as follows. Expenditure Credit O/O of Expendituresto Category Amount be Financed I( 1) Good, (SDR million) Works, Consultants' 10.9 I 100% 54 Services, and Non-Consultant Services for Part 1 o f the project. (2) Good, Works, Consultants' 4.9 100% Services, and Non-Consultant Services for Part 2 of the project. (3) Good, Consultants' Services, 2.4 100% Non-Consultant Services, Training and Operating Costs for Part 3 o f the project. (4) Unallocated 2.0 Total 20.2 I 7. Country Issues 29. As stated in the Governance Strategy Note (2006), significant improvements have been made in strengthening public financial management systems in Honduras, with the launch o f a comprehensive reform program to support the implementation of the 2004 Finance Law, the implementation o f SIAFI at the central level of government and the National Payment System. However, corruption remains a serious concern and the attitude toward compliance and control as well, which impedes growth and development. Therefore, as an effort to support improvements in governance in Honduras, accelerate growth and make sustained progress in poverty reduction, the Bank has produced a Governance Strategy Note which provides a framework for the Bank's involvement in Honduras. This note recommends specific actions to strengthen transparency accountability and the demand for good governance across the portfolio through among others: extensive disclosure of project procurement information, strengthened partnerships with civil society and beneficiaries in project design and monitoring, regular risk assessments and enhanced supervision where needed and continuity of project staffing. This assessment has taken into account the conclusions of the Governance Strategy Note. 8. RiskAssessment Summary 30. The FM risk for this project has been assessed at Moderate and once there i s evidence that the mitigating measures have been implemented and are working as intended, the level o f FM risk for this project will be re-assessed and revised accordingly. The following table presents the risk assessment, as well as the risk `mitigating measures incorporated into the design of the project and the financial management implementation arrangements. Risk Risk Risk Mitigating Measures Incorporated into Condition of Board Rating Project Design Presentation or Effectiveness (Y/N)? I ITransparency International's Corruption indices, and desoite recent measurable imnrovements in the 55 Entity Level S Project Level M ENEE will be responsible for the technical content of the project, and CPME will be responsible for procurement and financial management which will facilitate timely execution and full compliance with WB rules without imposing excessive burden on the limited administrativecapacity of ENEE. The use of CPME is relevant as CPMEhas prior experiencewith managingfiduciary aspects of Bank financed projects (including credit 3939-HO and TF057803 for the preparation of this project) The subsidiary agreement between SEFINiCPME and ENEE will define specific responsibilities of CMPE and ENEE. The Credit Agreement will include a covenant that CPME will be required to maintain adequate implementation arrangements at Control risk Budgeting, M Project budget and accounting will be registered in OM to be finalized by Accounting, the national system (SIAFI), and CPME will utilize effectiveness Internal UEPEX (module of SIAFI developed especially for Control projects) when available. In the meantime, until UEPEX can be implemented, CPME can use its existing system(SIG). The projectwill prepare an operational manual. Funds Flow L The Project will use the single treasury account to make payment to suppliers, contractors and consultants. Financial M The project will utilize country systems (SIAFI and Reporting, UEPEX) for accountingand financialreporting. Auditing CPMEwill furnish audit reports to the Bank. FMRisk M S = Substantial,M= Medium, and L = Low 9. FinancialManagementAction Plan 3 1, The FM Action Plan i s proposed as follows. Action Responsible Completion Entity Date' 1. Finalize the draft format o f unaudited CPME By effectiveness financial reports (IFRs). 2. Finalize draft audit TORSand short list. CPME By effectiveness 3. Finalize the draft FM section o f the project CPME By effectiveness operational manual. 5This column solely presents the estimated completion date, not an indicationof legal conditions. 56 4. Finalize the proposal inrelation to the chart CPME By effectiveness o f account and incorporation o f the project into SIAFI's structure and the implementation o f UEPEX. 5. Contract external auditors, based on short CPME 3 months after list satisfactorv to the Bank. effectiveness 10. World BankFMSupervisionPlan 32. A World Bank FM Specialist may perform a supervision mission prior to effectiveness to verify the implementation o f the unit and the FM system. After effectiveness, the FM Specialist must review the annual audit reports, should review the financial sections o f the quarterly IFRs, and should perform at least one supervision mission per year. 57 Annex 8: ProcurementArrangements HONDURAS: Power Sector EfficiencyEnhancementProject A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits'' dated May 2004 and as revised in 2006, and the "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004 and as revised in 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior reviewrequirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementationneeds and improvements in institutional capacity. 2. Procurement of Works. Works procured under this project would only include minor works for the renovation and rehabilitation of offices, call centers and the Distributions Operation centers. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank 3. Procurement of Goods. Goods procured under this project would include (i) Automated Meter Reading system, (ii) Automated Commercial Management System, (iii) Corporate Resources Management Information system, (iv) Recording Management System, (v) Software for the call center, (vi) Office furniture and computers for the offices, call centers and the distribution operation centers, (vii) Portable reading terminals for 100 users, (vii) equipment for maintenance o f the distribution network and (ix) Equipment for the office of transparency. The procurement will be done using the Bank's SBD for all ICB and National SBD agreed with or satisfactory to the Bank. Procurement activities would be audited by an independent firm contracted under TOR satisfactory to the Bank. Said firm would be hired by CPME no later than 90 days after the Effective Date. 4. Procurement of Non-consulting Services include services other than consultant services for: (i)the inspection, identification and replacement of PCB-containing equipment and disposal of PCBs under Component 2 of the Project; and (ii)the implementation o f the communication, outreach and participation program under Component 3 o f the Project. 5. Selection of Consultants. Consulting firms and individuals will be recruited for the (i)identification of the rehabilitation works of ENEE's offices, Call Center's and Distribution Operation Center's offices (ii)Reorganization of ENEE's Institutional structure. (iii)Strengthening o f the commercial and distribution functions o f ENEE, (iv) 58 Carrying out studies on the tariff structure and subsidies and for the development o f a strategy for commercial operations, and (v) Implementinga communication, outreach and participation program .Short lists o f consultants for services estimated to cost less than USD $100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.. Methods to be used for Selection o f Consultants are described in Section E (Thresholds for Procurement Methods and Prior Review). Consultants would be contracted under TOR satisfactory to the Bank. Procurement procedures for the recruitment o f the consultants and their performance would be assessed by an independent firm contracted under TOR satisfactory to the Bank. Said firm as indicated in paragraph 3, would be hiredby CPME no later than 90 days after the Effective Date. 6. Operating Costs. Expenses on account o f Project management and monitoring, including office supplies; utilities; rent; communication expenses, including the telephone, the Internet and fax; vehicles and maintenance; insurance for vehicles and computer equipment, office equipment and computer operation and maintenance; transport; travel; subsistence; per diems; supervision costs; and salaries o f technical staff for supervision, training and office support would be financed as operating costs and procured using comparison procedures, whenever possible, using standard documents acceptable to the Bank. 7. The Operation Manual will specify procurement procedures and SBDs to be used for each procurement method as well as model contracts for the procurement of works, goods, non-consulting services and consulting services. It will describe the fiduciary responsibility of the CPME, the technical responsibility o f the ENEE and the internal procurement mechanisms. The Operation Manual specifies that all staff will be subject to the applicability of the "Codigo de Conducta Etica del Servidor Publico". It i s advisable that all specialists involved in fiduciary activities be familiar with the contents o f this document. B. Assessment of the Agency's Procurement Capacity 8. Organization and Functions. Following a procurement assessment on ENEE and CPME, it was decided that ENEE will be in charge of the technical aspects, while procurement administrative activities will be undertaken by CPME. This decision was taken based on CPME's prior experience with managing fiduciary aspects o f Bank financed projects (including credit 3939-HO and TF057803 for the preparation o f this project) and the familiarity o f CPME's procurement specialist with Bank's procedures and the use o f SEPA. CPME i s considered to be in a good position to manage the fiduciary aspects o f the project. CPME will be responsible for the preparation o f expression o f interest, short listing, preparation o f bidding documents and request for proposals, issuing o f the invitations for bids and request for proposal, proposal's and bid's evaluation and evaluation reports, negotiations and awarding and signing o f contracts. ENEE will be responsible for the technical aspects of this project. ENEE will provide the technical specifications, terms o f reference and any other technical information needed to carry out each procurement activity (preparation of bidding 59 documents, bidding, bidder's clarifications, and evaluation and awarding o f contracts). ENEE will also participate in the proposal's and bid's evaluation and on the award of contract. 9. Staffing. CPME will carry out its functions using existing staff (one procurement specialist with a solid experience on Bank's procurement procedures and two procurement analysts.). CPME will hire a national procurement specialist to strengthen its current capacity; this specialist will be recruited under TOR satisfactory to the Bank. 10. Risk Assessment. The overall risk assessment for the project is high. The factors used for this assessment were the (i)high risk procurement environment in which this project will be implemented, (ii) CPME's lack o f experience in handling energy projects and therefore in procuring the specific type o f equipments needed for this project, and (iii)the risk associated with the potential lack of coordination and understanding between, CPME and ENEE. This lack o f coordination might cause important delay inthe procurement activities, such as ifthe flow o f information i s not as required for the smooth implementation o f this project. 11. To minimize this risk both institutions will be staffed before the effective date o f this project with the appropriate staff. CPME's capacity will be strengthened with a procurement specialist, an energy sector specialist, and a monitor and control specialist; ENEE will nominate a focal point person with substantial experience on the energy sector, who will be working with CPME on the preparation o f the Annual Operation Plans, bidding and proposals documents, and requests for payments among other responsibilities. The Operation Manual will specify the coordination mechanisms between CPME and ENEE, and a consulting firm will supervise/audit the procurement process as needed. 12. Action Plan. Most o f the issuedrisks concerning the procurement component for implementation o f the project have been identified and the time frame to mitigate these risks proposedas follows: Action Time Frame 1. Finalize the procurement planfor at least the first 18 Completed months of project implementation. 2. Finalize procurement sections o f the Project Operational Prior to Effectiveness Manual 3 , Selection and contracting o f 3 national consultants to Before Effectiveness strengthenCPME's fiduciary responsibilities (procurement, energy and control and monitor specialist). 4. Hire a consulting firm to audit/advise CPME's 90 days after procurement procedure and consultant's performance Effectiveness 5 Nomination o f a focal point person at ENEE Before Effectiveness 6. Training on Bank-financed procurement/hannonized Duringimplementation documents 60 C. ProcurementPlan 13. A draft procurement plan has been developed for the project implementation which provides the basis for contract grouping and identification o f procurement methods. The procurement and consultant selection method, estimated costs, procurement packages, prior review requirements and time frame have been agreed upon among CPME, ENEE and the Bank. The Annual Plan will be submitted to the Bank via SEPA before implementation. The Plan will determine the activities that are subject to prior and post review. The Procurement Plan in SEPA would be updated regularly to reflect the progress o f the planed activities. All procurement- related payments would be carried out through SIAFI and reconciled with the activities in the procurement plan. All contracts and purchase orders would include Fraud and Corruption clauses, as well as a clause giving the Bankthe right to inspect and audit contractors, consultants and suppliers. D. Frequencyof ProcurementSupervision 14. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the CPME has recommended two (2) supervision missions to visit the field to carry out post review of procurement actions. 61 E. Detailsof the ProcurementArrangementsInvolvingInternationalCompetition 1. Goods, Works, 1(*) I 2 3 4 1 5 1 6 7 1 Contract Estimated Procurement P-Q Domestic Review (Description) cost Method Preferenc by Bank Bid-Opening zs e (Prior I Date (yes/no) I Post) I.IMPROVINGENEE's CI MMERCIAI ANDCORPORATERESOURCEMANAGE + 4,233,000 Automated Meter Reading System Installation- 6,520,000 ICB NO NO Prior 2 Mar 2009 acquisition of CMS, Corporate Resources System (IRMS) and CRMIS and software for the Development Operation Centers 1.5 Computers 564,000 4-April - I 1.6 Portable terminals 280,000 Prior I. InternalIP 10 224,000 Prior communication m-j++ I network (software and hardware I. Software- 11 200,000 Prior 27Nov 11 Hardware call centers TRIBUTIOP 3,000,000 ICB IN0 IN0 Prior 13 Feb 09 1 I I I I (transformers etc.) 11.15 Replacementof 4,400,000 ICB NO NO Prior 1 16 Apr 09 PCB I11 INSTITUTIONAL Cr PABILITY 111.21 Communications , 695,000 ICB NO NO Prior 27 April - outreach and 09 participation (several contracts) 62 2. ConsultingServices 1 2 3 4 I 5 6 1 7 Ref.No. Description of Estimated Selection Review Expected Cornments Assignment cost Method by Bank Proposals (Prior I Submission Post) Date I.IMPROV YGENEE's COMMERCIA ANDCOR # 1.3 QCBS Prior 9-Apr 09 Assistance and User's survey (1,400,000 users) 1.13 Technical 270,000 QCBS Prior 16-Apr-09 assistancefor installation of CMS, IRS and CRMIS 11.INSTIT' JTIONAL CAP ,CITY BUIl DING 111.16 Strengthening 240,000 QCBS Prior 2-Dec-09 power sector governance 111.19.1 Corporate 450,000 QCBS Prior 27-Aprl-09 I11 19.2 Strengthening for the lecture metering and the hiring of an energy supplier (2 contracts) 111.20.1 Analysis of 500,000 QCBS Prior 27-Aprl-09 111.20.2 financial sustainability of ENEEand Development of a strategic corporate plan for the distributionand corporation. ( 2 contracts) 63 F.Thresholdfor ProcurementMethodsand Prior Review - (in1 ;$ thousands) Expenditure Control Value ProcurementMethod Contracts Category (Threshold) Subjectto Prior Review 1. Works, Goods and Non Consulting services 1.A Works >1,500,000 ICB All > 10,000 <1,500,000 NCB First two 1.B Goods/Non- > 150,000 ICB All Consulting >10,000 <150,000 NCB First two Services 1.c WorksIGoods, and <10,000 Shopping First two no consulting - services 2. Consultant Services 2.A Firms >100,000 QCBS, All LCS,CQS,QBS, FBS <100,000 Idem TOR(by TTL) RegardlessofValue Single Source All 2.B Individuals >35,000 Comparisonof 3 CVS All (TORby TTL) <35,000 Chapter V of Guidelines TOR by TTL Regardlessof Value Single Source All with justification Note: QCBS = Quality-and C ;t-Based Selection LCS = Least-Cost Selection CQS = Consultant's Qualification (Firms) QBS = Quality-Based Selection FBS = Fixed Budget Selection 15. Considering the risk assessment rating, the proposed prior review thresholds for the project are US$1,500,000 for works, US$150,000 for goods and non-consulting services, US$lOO,OOO and above for consulting services (firms), and US$35,000 and above for individual consultants. 64 16. Consultancy services (firms or individuals) selected based on single source selection, irrespective of value, will be subject to prior review by the Bank. Short lists o f consultants for services estimated to cost less than US$ 100,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 of the Consultant Guidelines. 65 Annex 9: Economicand FinancialAnalysis HONDURAS:PowerSector EfficiencyEnhancementProject 1. This annex is concerned with the evaluation o f the economic and financial benefits o f the proposed project. Economic benefits are those associated with net savings in resources (resultingfrom electricity loss reduction inthe system) and better quality o f service (resulting from fewer interruptions o f service, timely response to incidents and repairs, and improved meter reading, billing and payment collection services). Financial benefitsare those associated with improvements inthe actual cash flows o f ENEE. 2. The different components of the project contribute to economic and financial benefitsas follows: 0 Component 1 can be conceptually divided into (a) a hardware element consisting of the installation o f AMR equipment, and (b) a management reorganization and systems implementation element, which includes the CMS, the IRMS and the CRMIS. The AMR element reduces theft with three consequences: a positive economic effect from savings in energy purchases by ENEEdue to consumers reducing their demand because they now have to pay (a price elasticity effect), an economic reduction o f consumer surplus due to reduced consumption, and a financial effect from increased receipts by ENEE from energy no longer stolen. The management element also has economic benefits from improved customer service, for example, clients spending less time lodging complaints due to billing errors as well as having lower duration interruptions as a consequence o f the IRMS. Component 2 can be conceptually considered a `hardware' component which includes a number o f system elements which have the following operational consequences: (a) the replacement o f ageing equipment provides a reduction intechnical losses (Le. heat loss inthe network), and (b) improvements inthe reduction o f frequency and duration o f electricity interruptions through increased reliability-with economic benefits to users who are able to better enjoy the service. Both o f these economic benefits translate directly into equivalent financial benefits to ENEE through savings in energy purchasedor generated, or through increased billing. Component 3 i s concerned with institutional capacity building, which certainly provides perceivable economic benefits (e.g. better governance and management), which are, however, very difficult to measure, and their quantification was not attempted inthis evaluation. The following table summarizes the issues associated with the analysis o f the project. 66 Component Economic Benefits Financial Consumer Evaluation Benefits surplus AMR Savings from lower Same as economic Reduceddue to Information generatiodpurchases. benefits, plus very lower available, but No economic large benefits consumption assumptionson benefits from from increased price elasticityare increasedbilling bi11ing. typically (theseare transfers uncertain. only) Computer Systems Shorter service cuts, Reducedlost Increasedsurplus Informationnot better customer billing due to due to greater available for service service cuts availability rigorousanalysis, but closely related to AMR Maintenance Reducedlosses Reduced Increasedsurplus Loss reduction equipments (generation/purchase purchases and due to greater benefits can be savings), shorter generation, availability estimated service cuts, better reducedlost customer service billing due to service cuts Replacement and Healthbenefits to None Negligible effects Informationnot disposalof PCB- operators and on demand available for contaminated populationinthe rigorousanalysis equipment vicinitv of eaubment Communications Improvedcustomer Customers should Expected Not quantifiable program contact, better respondby increasedsurplus with existing relations with clients, improved by more efficient information savings due to better payment, better use of electricity use of electricity collections Improved Reducedwaste Savings in No direct effects Not quantifiable, Governance associatedwith efficiency and on demand but benefits could program faulty administrative improved be substantial procedures procurement A. ProjectEconomic Analysis 3. The economic analysis will encompass Components 1 and 2, which includes the AMR component, the systems component and the maintenance equipment component. Economic benefits from the project are associated with resource savings, some o f which can be more readily assessed than others. For example, benefits associated with loss reduction can be traced to resource savings in generation, but benefits associated with shorter outages or better quality o f service in both components 1 and 2-which are related to the value of users' time-are uncertain and difficult to quantify. The economic analysis that follows i s conservative and takes into account benefits which can be quantified reasonably well, and consequently the results regarding net present value (NPV) and internal rate o f return (IRR) should therefore be seen as lower bounds relative to the actual economic indicators. 4. Benefits of AMR component. The physical consequence of instituting this measure i s expected to lead to reduce total losses from approximately 20-25 percent o f the electricity generated to around 10-15 percent, i.e. a reduction of approximately 10 percent. This amounts to around 700 GWh per year. Current billed consumption of large 67 users (400 kWWmonth o f consumption or above) which are candidates to having AMR equipment installed amounts to around 2,900 GWh per year, which would imply that their actual consumption is on the order of 3,600 GWh per year. When the meters are installed and fraudhnder-billing i s eliminated, these consumers are likely to decrease their consumption, i.e. they will not maintain their consumption level at 3,600 GWh. The economic analysis assumes a conservative reduction in their consumption o f 1 percent. This has two economic consequences: Resource savings due to the reduced consumption which leads to lower energy generation (or reduced purchases from IPPs); these savings are valued at the marginal cost o f energy; and A welfare loss associated with the reduced consumer surplus o f customers who forgo electricity use. Consumers value this lost consumption at betweenzero and the tariff. The analysis assumes that it is valued at the average o f these two extremes. 5. Benefits of technical loss reduction. The economic benefits associated with technical losses are less speculative; the project i s assumed to reduce technical losses by 2 percent, resulting in energy savings at peak load o f around 1lGWh in the first year. They are valued as savings at the generation level, at peak load, and at the corresponding marginal cost for energy and capacity, which i s considered representative o f the marginal cost from ENEE's energy purchases from independent power producers. This is a conservative evaluation in the sense that it does not take into account distribution and transmission savings, which are implicitly considered as sunk costs. 6. Base case evaluation for components 1 and 2. The economic results from an evaluation o f the project's costs and benefits (encompassing both AMR benefits and technical loss reduction benefits) are shown inTable 9.1, and are summarized as follows: I Summary of Results for Economic Evaluation of Project 1 Base Case Present Value o f Costs $24 million 1 Present Value o f Benefits $38 million Net Present Value $14 million IRR 20% It is worth noting that the resultingIRRis a lower bound on the real IRRo f the project, as a number o f benefits are not being taken into account, such as economic benefits associated with reduced duration o f power cuts and better customer service. 7. Sensitivity analysis. In order to obtain further insight into the possible range of variation o f the economic indicators, the following cases were examined: a. Technical Losses reduced from by one half. The project's effect on technical losses i s uncertain in quantitative terms, as it involves transformer replacements at sites which have not yet been defined. A more conservative approach leads to the following results: 68 Summary of Results for EconomicEvaluationof Project ReducedTechnicalLosses Present Value o f Costs $24 million Present Value o f Benefits $30 million Net Present Value $6 million IRR 15% Although there i s a reduction in the net present value and the rate o f return, the project still yields an IRR above the notional acceptable value o f around 12%. b. Effect of consumer surplus on the economic evaluation. The loss of consumer surplus from improved metering, while giving rise to a real economic effect, poses nevertheless a question as to whether such losses are legitimate, as they affect many consumers who are at the margin o f the law and cannot claim duress due to poverty. Consequently, ignoring the consumer surplus loss may provide a better approximation to a correct economic evaluation. It yields the following results: Summary of Results for EconomicEvaluationof Project Consumer Surplus Ignored Present Value o f Costs $24 million Present Value o f Benefits $56 million Net Present Value $32 million IRR 34% c. Effect of assumptions regarding nontechnical loss reduction. Although expectations regarding the reduction o f nontechnical losses appear to be well-founded, the actual reduction could be less. A sensitivity analysis was therefore conducted to examine the effect o f reducing nontechnical losses by half the amount of the base case. The following result was obtained: Summary of Results for Economic Evaluationof Project Reduced NontechnicalLosses Present Value o f Costs $24 million Present Value o f Benefits $35 million Net Present Value $11 million IRR 18% 8. Conclusion of economic analysis. The project presents robust economic results even if some fundamental benefits, such as those associated with improved maintenance and customer service (such as better service quality and shorter outages), are not quantified and taken into account inthe evaluation. B. ProjectFinancialAnalysis 9. The financial consequences of improvedmeteringand distribution management in component 1 consist o f (a) savings in production costs equal to the resource savings assessed in the economic analysis, and (b) increased revenues to ENEE resulting from 69 improved meter reading, billing and payment collection services. The benefits arising from component 2 and the reduction o f technical losses are essentially the same as those inthe economic analysis. 10. The financial returns o f the project are very high due to component (b) above and the high level of losses in the system at present. As a conservative evaluation, this analysis assumes that only 50 percent of the nontechnical loss i s recovered as effective meter reading/billing/collection duringthe project, which still yields a very high financial return: Summary of Results for Financial Evaluation of Project Present Value o f Costs $24 million Present Value o f Benefits $418 million Net Present Value $394 million I IRR >100% 1 11. Sensitivity analysis of financial evaluation of the project. With such a high financial rate o f return, the basic IRR does not change significantly under more conservative assumptions. For example, if AMR only recovers 25 percent o f the nontechnical loss, the financial IRR still remains above 100%. 70 T(9 O N . m C. Financial Analysis of ENEE 12. Financial Analysisfor 2003 2007. Based on the audited financial statements for 2003, - 2004, 2005 and 2006, and the preliminary financial statements for 2007, ENEE incurred heavy operating losses (see Table 9.2) primarily because o f the low CRIs and the government's delay in raising tariffs in line with fuel price increases (at the end o f 2007, the average cost o f power purchases was 14 percent above the retail tariff). Contributions from the government, US114 million during the period, have not helped alleviate the situation. In addition, gross uncollected accounts increased, with the collection period for individual customers increasing from 60 to 74 days and failure by boththe central government and autonomous entities to pay for the electricity supplied. The situation was further aggravated by the government's delay in paying to ENEE US$ 24.7 million corresponding to the Bonochenta subsidy.Given that ENEE accumulated up to a total deficit of US$ 715 million, ENEE's net worth diminishedfrom US$ 1,309 million in2003 to US$'822 million in2007. 13. Liabilities, which include the short and long term financial and banking debt, both internal and external, and the debt with contractors and suppliers, increased by 36 percent, from US$ 655 million in 2003 to US$ 891 million in 2007. Debt service in the period was primarily cancelled with funds from the central government, while investments were financed by the private sector, the central government (through FOSODE) and external funds (for rural and Table 9.2. ENEE's FinancialSituation: 2003-2007 Depreciacion de equipos de generacy afine 100,9 95,6 93,6 93,9 80,9 466,5 505,4 510,O 579,9 634,l Resultado neto operativo (105,7) (107,3) (86,O) (96,5) (103,O) EBITDA (4,8) (11,7) 7,5 (2,s) (22,l) Resultado financieros y por tenencia lntereses (194) (22,O) (17,3) (28,O) (22,l) Perdidas cambiarias neto (542) (473) 202 (5,5) (15,8) Otros gastos de operacibn (38) (0,9) (1,9) (132) (1t6) Otros ingresos o (egresos) (12 ) 6,4 5,3 5,O 1 2 Utilidad antes de impuestos (184,3) (171,4) (79,7) (138,3) (141,3) lmpuestos Utilidad (Perdida) neta del ejercicio (184,3) (171,4) (79,7) (138,3) (141,3) social electrification projects). At the end o f 2007, ENEE's cash flow had deteriorated due to the increase in energy costs, which generated US$ 134 million of debt with the generators. This 72 situation has been addressed in the 2008 budget and ENEE has been capitalized through the issuingof US$ 158.8 million ingovernment bonds and through the payment o f the government's debt to ENEE from subsidies and energy consumption. 14. Financial Projections for 2008-2015. Financial projections for ENEE were formulated for 2008-2015. They were prepared using the 2006 audited financial statements and unaudited data for 2007. The general assumptions for the analysis were: (i)currency values expressed in lempira and adjusted by domestic inflation, with an exchange rate o f lempira/US$ 18.89; (ii) demand projections elaborated by ENEE's Planning Department in December 2007, with a 7 percent annual increase, a 67 percent increase in installed capacity by 2015 and a 0.6 percent annual loss reduction, reducing the overall losses to 16 percent by 2015; (iii) expected 27 percent tariff increase in 2008 (the actual increases amounted to 34 percent), up to an average tariff o f 2.53 lempira /kWh (US$ 0.134/kWh); (iv) average cost of purchased energy is US$ 0.14/kWh for 2008 and 2009, decreasing thereafter to US$ 0.1l/kWh as new generation plants come in line (cost o f purchased fuel were estimated at: Fuel Oil No. 6 NY/BTN 72.3 US$/bbl, Gas Oil (45 cetane, 0.5 percent sulfur) 110.0 US$/bbl, and Coal 94.0 US$/ton); (v) investment in generation, transmission and distribution were estimated at US456 million (for this, existing investments from the IDB and Nordic Funds, and future investments by the IDB and the World Bank, with the remaining to be potentially financed by the government or others sources o f funds such as Petrocaribe); (vi) in 2008 ENEE was capitalized with 3.0 billion lempira (to cancel the outstanding debt with the generators and to finance investments), with the government also contributing 1.0 billion lempira to cancel its debt for the Bonochenta subsidy and to pay for the energy consumed in 2007 by the government itself, municipalities and Autonomous Entities; (vii) the cancellation o f the domestic and external debt service will be assumed by the government until ENEE i s in a condition to assume the required payments (in this regard, cancellation o f the liabilities owed to the government has not been considered); and (viii) price elasticity o f demand and the likely reduction in energy dispatch as a result o f the increase in tariffs, as well as the effects o f a more aggressive loss reduction policy and o f the renegotiation o f contracts have not been considered. 15. Results. Preliminary results of the financial projections show that the 27 percent tariff increase would cover generation costs (purchases and fuel) but would be insufficient to cover other operating costs, leading to a total operating financial deficit o f 4.78 billion lempira (US$ 253 million) until 2012 (see Table 9.3). The deficit for 2008-2012 has been estimated at 11.1 billion lempira (US$ 590 million), which includes the operating deficit and an additional US$ 337 million for'debt services and investments without financing. This project will help reduce this deficit but further action is requiredby ENEE and the government bothon the tariff side and on reducing losses and improving efficiency. Table 9.3. FinancialProjectionsfor ENEE:2008-2015 En Millones de Lps Superavit (Deficit) Total 73 Annex 10: SafeguardPolicy Issues HONDURAS:PowerSector EfficiencyEnhancementProject 1. Environment. In general, electricity distribution projects are classified as low environmental impact activities. Such i s the case inmost legislation inLatin America and World wide. Nonetheless, old equipment still contains dangerous chemicals, polychlorinated biphenyls (PCBs), which require special handling and strict final destruction requirements. InHonduras, as in most Latin America, transformers and breakers used PCBs until the end of the 197O's, but equipment replacement has been slow. It is estimated that the public electric distribution system in Honduras could have more than 500 units with PCBs concentrations above 50 ppm and thus require special environmental handling. The final disposal o f all transformers and breakers with PCBs poses a serious threat to the environment if adequate procedures are not implemented. Therefore, the project environmental management strategy i s twofold: (a) the implementation of ENEE's "Plan for Replacement and Handling of PCBs", and (b) the development of best practice environmental guidelines for the electricity distribution sector o f the country. 2. The environmental assessment report has been released in-country and was filed in the Infoshop on October 17, 2008. The project i s expected to be largely beneficial to the environment, as improvements on continuity and reliability o f service will reduce the need for individual energy sources, which are often a major source of air and noise pollution. The project has national coverage in urban areas. It i s not expected to produce major or irreversible environmental impacts. Electric distribution projects do not represent a threat to the environment, and that i s the case here. The project will support ENEE in the implementation o f its "Plan for Replacement and Handling o f PCBs". Environmental management considerations are incorporated in the "Environmental Guidelines for Distribution Projects", a good environmental practices manual that i s expected to be adopted by the company for all its distribution projects, The implementation o f this project will also comply with "Environmental Guidelines for Minor Works". 3. The project carries an environmental classification o f "B". Other safeguard issues (forests, involuntary resettlement, safety o f dams, pest management, natural habitats, project in disputed areas, physical cultural resources and project in international waterways) would not be triggered by the proposed project. 4. ENEE's Plan for PCBs will adopt the international environmental guidelines following the Stockholm Convention for PCB disposal. It will also be included in Honduras's "National Plan for PCBs", currently under development by SERNA. SERNA, with support from UNDP, produced a national PCB inventory upon which it i s elaborating the National Action Plan to manage equipment containing or likely to contain PCBs as part of a more comprehensive set o f regulations for hazardous chemical waste management that i s being prepared by SERNA with the support o f USAID. Elaboration o f the overall National Action Plan for Persistent Organic Pollutants and in particular for PCBs i s led by the Center for Study and Control Pollutants (Centro de Estudios y Control de Contaminantes) of SERNA with the participation o f the National Hydrological Resources Directorate, the Environmental Control and Evaluation Directorate, the Environmental Management Directorate and the Biodiversity Directorate. 5. ENEE's "Plan for Replacement and Handling of PCBs" includes the following activities: (i)completion of the inventory of PCB containing equipment, (ii)identification of sites 74 contaminated with PCBs, (iii)purchase o f sampling equipment, (iv) provision o f information, capacity building and training for ENEE's employees, (v) verification that temporary storage o f PCB containing equipment i s made following appropriate safety procedures, and (vi) final disposal o f PCB containing equipment according to international guidelines. A special Commission will be created to oversee all the activities related to PCB management and disposal. This Commission will be composed o f representatives o f ENEE, SERNA, the Health Secretariat, the Firefighters,and private sector and/or professional associations' representatives. 6. ENEEhas adopted a set of environmental guidelines for the implementationof activities in the electricity distribution sector ("Environmental Guidelines for Distribution Projects". Joint technical working sessions were heldwith SERNA to receive their guidance and reach consensus on the scope and terms o f the proposed guidelines. The adopted environmental guidelines are expected to eventually be adopted for all investment and maintenance electric distribution activities carried out by ENEE in the country. The scope o f the adopted environmental guidelinesi s briefly described inBox No.1. 7. Other environmental issues were investigated during Project preparation, in particular those with reference to physical cultural property preservation. Interaction with field officers tends to minimize the risk o f such findings. Nevertheless, the Environmental Guidelines for Distribution Projects do incorporate a detailed procedure to implement in the contingency of such findings, in accordance with the recommendations o f OP 4.1 1. 8. Poverty impacts. Poverty and inequity remain huge challenges in Honduras. Sixty four (64) percent o f the population i s poor and 45 percent lives in extreme poverty. A factor influencing this situation i s the lack o f basic services such as electricity, which reduces the opportunities o f growth. In Honduras the access to electricity service remains the lowest in Central America, with an average coverage o f 69 percent in 2006. However, the situation i s particularly bad in the rural areas where the coverage is 44 percent, lower than half the 96 percent existing in urban areas. Although the government offers a subsidy to residential users consuming less than 300kWh/month, only 14 percent o f the total subsidy benefited poor households with an average o f electricity consumption below 1OOkWh/month. The proposed modernization will help to better target poor beneficiaries and mitigate any negative impact from electricity bills. 9. Social Safeguards. The project will not trigger any o f the social safeguards (Indigenous Peoples OP/BP 4.10, Involuntary Resettlement OP/BP 4.12 or Physical Cultural Resources OP/BP 4.11). Proposed rehabilitation works under the project will not cause any physical impact causing resettlement or affecting cultural assets, as corroborated by the environmental assessment. Indigenous peoples communities, located mainly in the rural areas, might benefit from the rehabilitation o f distribution networks at the Center-South and at the Atlantic Coast. Indigenous communities will continue receiving a subsidy in electricity consumption. 10. Communication Outreach and Participation Program. Component 3 of this project comprises a communication, outreach and participation subcomponent. This subcomponent has been designed in a participatory manner through stakeholders consultation carried out during project preparationto contribute to the following objectives: (i)complement the project's quality enhancement purposes through an outreach campaign with selected consumers to address some o f the problems affecting ENEE (e.g. inadequate attention to the commercialization functions 75 and poor customer service, illegal connections and electricity theft, and reduced payment collection), (ii)improve the ENEE-consumer communication interface by establishing information channels to receive feed-back, share responsibilities and improve transparency, and (iii)strengthentheareasinENEElinkedto customer service, to speedtheirresponseandtrain staff to adopt the new customer service systems. This subcomponent will carry out three main programs: (i)outreach and consumers' participation program, (ii)communication and transparency program, and (iii) institutional strengtheningprogram. BoxNo.1 Environmental Guidelines for Distribution Projects. Content. - 1. Introduction. 2. Basic Instructions:Overview and recommendationsfor effective use ofthe Guidelines. 3. Planning and organizational framework for environmental management: Description of the conceptual, organizational and operational framework for the effective implementation of environmental management in general, applied to the specific case of electricity distribution companies in Dominicanrepublic. 4. Legal and Regulatory considerations: Presentation and description of the legal and regulatory environmental framework applicable to the electricity distribution sector. It includes a brief description of major legislation related to environmental issues, and a summary presentation of participatingagencies 5. Activities description: Presentation of the basic components and activities associated with the provision of electricity from the transmission lines to the final user. For each type of activities a list of maintasks is presentedindicatingoptions and sub-activitiesto implement. 6. The Environmentand its Characterization: Descriptionof the environmental components and issues to take into account while planning and implementing electricity distribution networks. Each environmental element is defined and sources of basic data are suggested. 7. EnvironmentalImpactsand EnvironmentalManagementGood Practices: This is the core area of the Guidelines. For each construction, operational and maintenance sub-activity identifieda CARD was developed considering as target audience those who have to plan and implement the environment mitigation, conservationor preservationactivities.The card includes: Code; description of tasks that are likely to cause environmental degradation; description environmental measures to implement; classificationof the measures to implement; description of the likely impact; responsible party; and, recommended timing. A contingent procedure was defined in case of discovering cultural physical assets that ought to receivespecial care. 8. Monitoring and Evaluation System: Simple guidelines for the implementation of a monitoring and evaluation system for the environment and the impacts from Project activities. The monitoring and evaluation system guidelines cover planning,implementation, operation and maintenance activities. 9. Occupational health and industrialsafety. 10. References and bibliography: List of documents and material used during the preparation of the Guidelines. 11. Glossary: Definition of maintechnical terms used in the Guidelines. 76 Annex 11: ProjectPreparationand Supervision HONDURAS:Power Sector EfficiencyEnhancementProject Planned Actual PCN review October 29,2007 October 29, 2007 Initial PID to PIC Initial ISDS to PIC Appraisal October 24,2008 Negotiations November 15,2008 Board/RVP approval January 22,2009 Planned date of effectiveness June 2009 Planned date of mid-term review June 2011 Plannedclosing date December2013 Key institutions responsiblefor preparation o f the project are ENEE and CPME. Bank staff and consultants who worked onthe project included: Name Title Unit Fernando Lecaros Task Team Leader LCSEG Xiaoping Wang Co-TTL/Energy Specialist LCSEG Almudena Mateos Energy Specialist, Consultant LCSEG Jonathan Halpern Energy Adviser ETWWA Dante Mossi Sr. Country Officer LCCHN Gladys Sakata Program Assistant' LCSEG FabienneMroczka Financial ManagementAnalyst LCSFM Patricia De la Fuente Hoyes Sr. Financial Mgt Specialist LCSFM Etel Bereslawski Sr. Procurement Specialist LCSPT Maria Castro-Muiioz Sr. Social Scientist LCSSO Alejandro Deeb Environmental Specialist, LCSEN Consultant Pilar Gonzalez Sr. Counsel LEGLA Demetrios Papathanasiou Peer Reviewer ECSSD Vladislav Vucetic Peer Reviewer M N S S D Salvador Rivera Peer Reviewer EASTE Bank funds spent to date on project preparation: 1. Bankresources:US$352,255 2. Trust funds: US$1.O million (PHRD) 3. Total: US$1,352,255 77 EstimatedApprovaland Supervisioncosts: 1, Remainingcoststo approval:US$20,000 2. Estimatedannual supervisioncost: US$90,000 78 Annex 12: Governance:Framework,ChallengesandAction Plan HONDURAS:Power Sector EfficiencyEnhancementProject A. Introduction 1. The Honduran electricity sector, the national electricity utility ENEEand this project face significant governance risks. The project aims to address key governance weaknesses both in the project context and, in combination with other Bank programs, at the sector level. While this limited investment operation cannot address all governance issues, it will serve as one among several vehicles for a dialogue with the government. Such a dialogue will help introduce governance reforms within ENEE and in its relationship with other sectoral institutions and support interventions that will lead to long-term solutions in conjunction with other governance- related instrumentshitiatives o f the Bank, IMF, and other donors. 2. The text below includes three sections. The first section describes the governance framework in Honduras under which this project operates, the second identifieskey governance- related challenges, and the third sets out a program o f actions to strengthen governance in the sector. B. Current GovernmentInitiativeson ImprovingGovernance 3. President Zelaya has put governance reform at the center o f the administration, focusing on public sector transparency and performance management as tools for strengthening accountability. 4. The Transparency and Access to Information Law, passed by Congress at the end of 2006, obliges institutions managing public funds, including ENEE, establish mechanisms for access to information. The implementation o f the Law, which is actively underway (i.e. creation o f the Access to Information Institute (IAIP) in 2007, appointment o f the Institute's Access to Information Commissioners, creation o f Access to Information Offices and Officials in all line ministries and decentralized public agencies), offers an important entry point to advancing further public sector reforms 5. All the fiduciary controls and systems for the execution of public projects, including ENEE's, are required to comply with the Transparency Law. Procurement notices have to be published on HONDUCOMPRAS, the web based system that makes public procurement publicly available. On financial management controls, projects are required to work with the certified SIAFI system, which facilitates supervision o f the financial execution and planning o f the project and makes some information available to the public. In addition, all projects in Honduras are included into the SEPA (Sistema de Ejecuci6n de Planes de Adquisiciones) initiative which makes procurement plans public. 6. The government has also made progress in accelerating the pace o f public sector reform through the development o f a results framework for monitoring the performance o f public 79 institutions and further improvements in public financial management. The Technical Support Unit of the State Secretariat of the Office of the Presidency (Secretaria de Estado del Despacho Presidencial Unidad de Apoyo Ticnico or UNAT) is mandatedto manage the system. In addition, the government approved a resolution inJuly 2008 for a national program of professionalization for public services, which has been successfully implementedin selectedinstitutions and is being expandedto other organizations on a voluntary basis. 7. Finally, the government adopted an Anti-Corruption Plan ("Plan del Poder Ejecutivo Contra la Corrupcidn'7 in September 2007. The objective of this Plan is to promote a culture of integrity and ethics that will prevent, detect, punishand eliminate corruption inthe public service, and strengthen the participation of Honduran society inthe fight against corruption. Some of the key goals of the Plan include: (i) implementation of the Transparency and Access to Public Full InformationLaw and creation of the Public InformationAccess Institute (IAIP); (ii)100 percent of public bidding processes disclosed through Honducompras: (iii)establishment of various coordination mechanismsamong different public entities; (iv) approval of the Civil Service Law; (v) external audits for Tribunal Supremo de Cuentas or TSC of HONDUTEL and ENEE conducted by an international auditing firm by 2008. This Plan is under implementation and regular updates are releasedby the government. C. Existing Activities of the Bank and IMF Related to Governance inHonduras 8. The Bank has achieved significant progress in mainstreaming governance into the Bank operations in Honduras. The FY2007-2010 CAS proposed a shift in the Bank's focus on governance issues from the project to the sector level, whilst taking steps to strengthen fiduciary management standards for all Bank operations. The three key elements of this strategy comprise: (i)sectorlevelfocusfor governanceandfiduciary assessments; (ii)strengtheningofnational a management systems for project financial management, procurement and monitoring; and (iii) measures to strengthentransparency, accountability and demand for good governance across the portfolio. The CAS underscored the promotion of reforms by engaging in dialogue with a broad range o f stakeholders, strengthening communication efforts, and supporting networks o f institutions working on governance issues. In this sense, stakeholder engagement early in the design of analytical work and Bank operations and follow-up throughout the project / AAA cycle was identified as critical. 9. To help introduce governance reforms in ENEE, it is worth noting several activities already completed or underway to improve governance inthe Honduran electricity sector. They include: a. Honduras Governance Strategy Note: A Framework for World Bank Engagement (2006). This Note emphasizes the need for the governance focus in Bank operations to move from the project to the sector level. It includes several suggestions for improving governance both in Honduras at large and ininvestment operations. b. Institutional and Governance Review (IGR). The IGR will provide a framework for policy dialogue among civil society and other bodies on a broad range of governance and institutional reform issues and will also contribute to the development of indicators that can be used to track progress in strengthening institutions, transparency and 80 accountability. The IGR includes a chapter that focuses on state-owned enterprises, including ENEE. c. Poverty Reduction Support Technical Assistance Credit (PRSTAC). The PRSTAC, which i s under implementation, provides technical assistance to the government in improving the efficiency o f ENEE, including its restructuring. Other activities in this sector include: the design o f institutional and regulatory reforms necessary to improve the performance o f the sector; a comprehensive study o f power tariffs, as well as o f various regulatory aspects o f the power sector, and o f mechanisms to stimulate private sector participation. d. Technical assistance to TSC for an audit of the energy purchase contracts, using the CGAC fund. Under the Governance and Anticorruption Plan enacted by the government, the Bank supported the TSC inthe review of the procurement process of PPAs for 250 MW which found excess payment for the energy due to a faulty procurement process. The report with recommendations from TSC requests Congress not to approve those contracts. Nonetheless, one o f the contracts was sent to the Congress for approval early September 2008 and was approved in October 2008. 10. In addition, although not directly targeting the issue of governance in the sector, the International Monetary Fund (IMF) stand-by arrangement covering April 9, 2008 to April 8, 2009 has two conditions relating to the overall financial sustainability o f the sector, namely: (i) implementinga tariff policy inthe electricity sector to ensure the recovery of the operating costs of ENEE by April 30, 2008; and (ii)eliminating the arrears o f ENEE to power generators by June 30, 2008. These two conditions had been met in the first half o f 2008. The inclusion o f these conditions in the IMF program serves as a vehicle to bring the IMF oversight into the sector, thereby providing for greater reviews by the Breton Woods institutions o f the sector and ENEE's overall performance, which inturn i s affected by governance related issues (such as the contracting o f power with independent power producers). However, because oil prices in 2008 have increased more than what was projected end 2007, there i s concern that new operating deficits may occur. D.GovernanceChallengesinthe Electricity Sector of Honduras 11. The Bank consulted with different stakeholders, including ENEEmanagers, labor unions, related government agencies, and the private sector, during the elaboration o f the Honduras Power Sector Issues and Options study6 and the preparation o f this project. The governance challenges identified can be classified into the following types: (i)lack o f transparency and accountability in decision-making, (ii)weak corporate governance, and (iii)low institutional capacity infiduciary aspects o f operations. 12. Lack of transparency and accountability in decision-making. Several factors are undermining governance in this area: (i)limited public access to information; (ii)lack of performance accountability; and (iii)lack o f public participation in decision-making and attention to customers. 6Honduras Power Sector Issues and Options, July 2007. 81 13. There i s lack o f transparency relating to the disclosure o f power sector information inthe possession o f the sector agencies. Following the implementation o f the Transparency Law, more information has been posted on the web by ENEE and CNE. However, access to information remains limited in terms o f coverage and accessibility. The timeliness of disclosure of information i s also inadequate since whatever information i s available relates to changes that have already taken place. 14. ENEE's performance is not accounted for. There i s no service standard and no measurement o f the quality o f services provided by ENEE. CNE i s mandated to regulate the quality o f services o f the electricity sector. However, it doesn't have the necessary capacity and resources to fulfill the mandate. 15. Accountability in the decision-making process i s also lacking. The quality o f public participation and government responsiveness are low, with the absence o f a systemic process o f participation or access by less-privileged groups and o f indications that public hearings are conducted on the issues facing the sector or ENEE.More interactive communications with labor, ENEEemployees, civil society, ENEEcustomers and the general public are needed. 16. The lack o f empowerment o f customers and the absence o f an organization that can representthem and voice their complaints are also major accountability weaknesses. The project will begin to address these issues by improving service standards, developing and monitoring performance indicators, implementinga complaints handling mechanism, and conducting regular customer satisfaction surveys. 17. Weak corporategovernance. ENEE was created as an autonomous state organization responsible for the production, transmission, distribution and commercialization o f electricity. However, as a growing source o f jobs and a conduit for large financial flows to and from the state and other private actors, it has not stayed autonomous or kept its professional management orientation. Political interference, as well as characteristics o f Honduras' broader institutional environment, contributed to the repeated financial and supply crises the electricity sector has experienced since the early 1990s. 18. Management positions were typically occupied by individuals lacking requisite qualifications and were subject to high rates o f turnover. Since 2006, when the Zelaya Administration came to power, six managers have been appointed to ENEE, the current one in February 2008. 19. Roles o f the Intervention Board (Junta Interventora), the Board o f Directors and the general manager are not clearly defined, which undermines the overall governance o f the company. Moreover, some key decisions are made at the Presidential level, which ultimately controls many decisions regarding the company. In May 2007, a Junta Interventora, headed by the Secretary of Defense, was appointed for a period of 90 days to manage the company with de facto board powers, and the Board of Directors was suspended during the period. The terms o f this interimstructure have been extended twice; as it current term expired on September 28, 2008, it i s very likely that the government will further extend its terms. 20. Low institutional capacity infiduciary aspects of operations. ENEE faces a number o f weaknesses inthe fiduciary aspects of its operations, manifested inhigh commercial loss, lack o f 82 a centralized, capable distribution and of a commercial management team, weak procurement and financial management systems, and lack o f transparency inprocurement. 21. Commercial losses o f electricity in ENEE are very high by industry standards. Total losses are currently around 20 percent, with total technical losses about 10-12 percent, and the rest estimated to be commercial innature, including illegal connections and "non-payment". This has occurred despite the fact that ENEE has outsourced its meter reading, billing and collection functions to the Honduras Electric Metering Service Company (Empresa de Servicios de Medicion Ele`ctrica de Honduras, or SEMEH). The sharing o f responsibilities between SEMEH and ENEE regarding consumer management remains unclear and has not proven conducive to the implementationof an aggressive loss reduction program. 22. The distribution and commercial functions reside with the three regional distribution units with no coordinated planning and commercial management practices or networked information systems. Most o f the commercial management i s still handled manually. The fact that ENEE does not have adequate management information systems makes it difficult to carry out targeted loss reduction interventions. 23. Assessments of ENEE's procurement and financial management capacity showed inadequate controls in the institutional procedures, cumbersome clearance process, loopholes in rules and procedures, as well as poor documentation. In addition, ENEE has faced questions regarding the practices in engaging with the private sector, notably in buying power from independentpower producers. The recent contracting of emergency power generation has drawn particular concerns about transparency inpower purchases. TSC commissioned a study to review the two recent emergency purchase contracts and found a few abnormalities inthe terms of the awarded contracts and the bidding process, including inadequate technical specifications, accepting extraordinarily high reference prices o f coal, and modifying contract terms after the bidding process was completed. As a result, the TSC recommend that the Congress not approve the contracts. Eventually, only one of the contracts was sent to the Congress for approval and was approved in October 2008. E. ProjectProgramto Address the GovernanceChallenges 24. The project proposes a pragmatic operational approach for improving sector governance, building on the existing operations of the Bank in Honduras and the two instruments developed by the government: the Transparency Law and the Results-based Management system (Sistema de Gerencia por Resultados) established by Presidency to set performance targets for public institutions and monitor progress. The specific actions are grouped into three pillars: (i) enhancing transparency, performance accountability and attention to consumers, (ii)improving corporate governance, and (iii) strengthening the fiduciary capacity o f ENEE in operational areas. 25. Pillar I:Enhancing transparency, performance accountability and attention to consumers. Enhancing transparency and accountability is essential for further management and 7 See the reports by consultants hired under the PHRD grants for project preparation (May 2008) and the report "lnforme de Evaluacion de la Capacidad Institutional de la Agencia Ejecutora ENEE' by Hernan Pflucker commissioned by IDB (April 2008). 83 governance improvements in the medium to long term and for mitigating the eventual reputational risks related to weak governance, including (i) allowing citizens to hold ENEE and the government accountable for performance in the electricity sector; and (ii)allowing clear accountability for performance of ENEE managers to their Board, and of ENEE itself to the government and the regulator. 26. Pillar 11: Improving corporate governance. This pillar aims to achieve a well- functioning corporate governance structure and improve the autonomy o f ENEE in decision making, including the roles of the Board of Directors and the general manager, the terms of Junta Interventora as an interim measure, and well defined criteria for selection and performance evaluation of senior managementand Board members. 27. Pillar 111: StrengtheningENEE capacityin Fiduciary Aspects of its Operations.The project will support ENEE in strengthening its capacity in fiduciary areas in internal control areas and inits commercial interactions with consumers. Specifically, the project will strengthen ENEE's financial management systems, procurement and improving accountability in its commercial functions (namely billing and collections). The emphasis of capacity strengthening i s to focus on: (i)strengthening the integrity of the procurement and financial management systems, and (ii)detecting and reducing fraud inthe areas o f new connections, metering, billing, and payments. 28. A summary of the governance-enhancing activities to be undertaken within the project and using other instruments within the reach of the Bank, including cost estimates, responsible parties, and time frame, i s shown inAnnex 12.1. 29. A detailed risk assessment was undertaken for procurement and financial management. The results of the risk assessment as well as the proposed mitigation actions are summarized in Annex 12.2. 84 c W 2 44 0 3 in L 0 a E J $ 5 ii: 0 0 3 0 zn 3 3 vl 0 0 2 n E- 8 "* m N 2 2 5 0 n N 3 a z3c 3 N wc 2 - w w rl 6 23 m 0 0 -, d r- -d: I a, c 0 a 2 3 z 3 3 9 3 3 3 N Y 3 il il z il I D T c? m m i- 2 Y 3 i a, c n m c I Y c a 0 0 2 2 a, c 0 0 3 0 u 3 Ea -0 0 80 rl - o\ 0 0 N E e L L W ziw 00 00 8 T t u 9 e, I) 0 5 a, a, P 0 m I s L c.' 0 m 2 U 3 E c.' ?s L - a2 U E 2L C a2 n s I - -.E! tE2m2E - E 0 c.' E s 2js 4 Annex 13: Documents in the Project File HONDURAS:Power Sector Efficiency Enhancement Project 1. Honduras Power Sector Issues and Operations, World Bank, July 2007. 2. Analisis Sostenibilidad Financieradel Sector, Informe Inicial, Banco Interamericanode Desarrollo, Mayo 2008. 3. Informe de Evaluacion de la Capacidad Institucional de la Agencia Ejecutora, Empresa Nacional de Energia Electrica, Hernan Pflucker, April 2008. 4. Pre-Informe ENEE, Funcionalidades Requeridas, Mercados Energeticos, April 2008. 5. Propuesta de unProyecto para la Mejora de la Gesti6n del Area de Distribucion y Comercial de la ENEE, Informe Final, Petro Antmann, May 2008. 6. Preparacion del Plan de Mejora de la Gestion del Area de Inversiones en Distribucion, Silvio Gbmez, May 2008. 7. Reparacion del Plan de Mejora de la Gestion Comercial del Area de Distribucion de la ENEE, Luisa Pilar Rodriguez Calisto, March2008. 8. Guia Ambiental para Proyectos de Distribucion, ENEE, September 2008. 9. Plan de Accion para la Sustitucion y Manejo de 10s Equipos con PCBs de la ENEE, ENEE, September 2008. 10. Primer Inventario Nacional de Bifenilos Policlorados (PCBs), SERNA, September 2008. 92 Annex 14: Statement of Loansand Credits HONDURAS:Power Sector EfficiencyEnhancementProject Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel Undisb Orig Frm Rev'd PI03881 2007 HNWATER AND SANITATION 0.00 30.00 0.00 0.00 0 00 30 01 0 00 0 00 PROGRAM PO81516 2006 HNJUDICIAL BRANCH 0.00 15.00 0.00 0.00 0 00 14 02 2 55 0 00 MODERNIZATlON PO82242 2006 HNNutrition andSocialProtection 0.00 20.00 0.00 0.00 0 00 1748 8 19 0 00 PO86775 2006 HN(CRLI) Rural InfrastructureProject 0.00 47.00 0.00 0.00 0 00 45 24 -2 81 0 00 PO883I9 2006 HN(CRL) Barrio-Ciudad Project 0.00 15.00 0.00 0.00 0 00 13 76 2 00 0 00 PO901 13 2006 HNGEF Rural Electrification 0.00 0.00 0.00 2.35 0 00 2 20 0 48 0 00 PO8331 1 2005 HNFirst ProgFin Sec Dev Pol Credit 0.00 25.00 0.00 0.00 0 00 12 28 26 96 0 00 PO83851 2004 HNPRS TAC 0.00 8.00 0.00 0.00 0 00 5 92 4 34 0 00 PO83244 2004 HNNuestrasRaices Program 0.00 15.00 0.00 0.00 0 00 3 51 3 18 0 00 PO70038 2004 HNTrade Facilitatio& ProductivityEnha 0.00 28.06 0.00 0.00 0 00 18 83 I 5 07 15 07 PO64914 2004 HNFORESTS& RURAL 0.00 20.00 0.00 6.00 0 00 8 45 4 66 0 00 PRODUCTIVITY PO55991 2004 HNLAND ADMINISTRATION 0.00 25.00 0.00 0.00 0 00 4 61 3 49 0 00 PROGRAM PO81172 2003 HN RegionalDev in the Copan Valley 0.00 12.00 0.00 0.00 0 00 2 59 I 4 3 0 00 PO40177 2003 HN Financial SectorTechnicalAssistance 0.00 9.90 0.00 0.00 0 00 7 41 6 33 0 00 PO53575 2002 HN-HEALTH SYSTEM REFORM 0 00 27.10 0.00 0.00 0 00 8 18 2 63 0 00 PROJECT PO07397 2001 HNCOMMUNITY-BASED EDUCATION 0 00 41.50 0.00 0.00 0 00 0 77 120 0 00 PROJECT PO64913 2000 HN EMERGDISASTERMGMT (TAL) 0.00 10.82 0.00 0.00 0 00 9 35 -0 68 0 00 Total: 0.00 349.38 0.00 8.35 0.00 204.67 79.02 15.07 HONDURAS STATEMENT OF IFC's Held and DisbursedPortfolio InMillionsofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1999 GranJaSMarinas 2 45 0 00 0 00 0 00 2 45 0 00 0 00 0 00 lnternational 9 00 0 00 0 00 0 00 9 00 0 00 0 00 0 00 Total portfolio 11 45 0 00 0 00 000 1145 0 00 0 00 0 00 93 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic Total pendingcommitment: 0.00 0.00 0.00 0.00 94 Annex 15: Country at a Glance HONDURAS:Power Sector Efficiency Enhancement Project Latin LOWer K e y Development Indicators America midde Honduas &Carib. income Age distribution, 2006 (2007) Male Female Population, mid-year(milions) 7 5 556 2,276 7 0 7 4 Surface area (thousandsq. km) 112 20,415 28,549 s 0 e 4 Populationgrowth (%) 2 1 1.3 0.9 Urbm population (%of total ppulation) 47 78 47 5 0 5 4 1 0 4 4 GNI (Atlas method, US$ billions) 11 3 2650 4,635 3 0 % GNIpercapita(At1as method,US$) 1,600 4,767 2,037 2C-24 GNI per capita (PPP, international$) 8,798 7,020 1 0 1 4 0 4 GDP growth (Oh) 6 3 5.5 8.8 15 10 5 0 5 10 15 GDP per capita growth (%) 4 2 4.2 7.9 percent (mosi recent estlrmte, 2000-2007) Povedyheadmunt rstio at $1 a day (FPP, %) 21 9 Povedyheadmunt rstio at $2 a day (FPP, %) 44 22 Under-5 mortalltymte(per 1,000) Life expectancyat birth (years) 69 72 71 Infant mortality(per 1,000live births) 25 26 31 80 1 Chiid malnutrition (%ofchildren under 5) 25 13 Adult literacy,male (% of ages 15 a d dder) 80 91 53 Adult literacy,female (% of ages 15 and older) 80 89 85 3 0 Gross primary enrollmeti, male (% d age group) 113 120 117 2 0 Gross primary enrollment,female (% of q e goup) 113 116 114 ~~~ 1 0 Access to an improved water source(% d population) 87 91 81 Access to improved sanitaton faulities(% of populatlon) 77 55 l W 0 1895 2WO 2 W 5 nHOndmsOLatinAmnca&theCanbbean Net Aid Flows 1980 1990 2000 2007 (US$ millions) Net ODA and offiual ad 102 446 445 681 Sruwth of GDPand GDP per caplta (%) TOP3 donors fin 2005) Japan 7 85 50 103 Span 6 35 95 O T United Sates 19 215 110 88 Aid (%of GNI) 4.2 16 0 6.5 7 3 Aid p s capita (US$) 29 92 70 94 Long-Term Economic Trends 63 85 w 05 Consumer prices (annual % chmge) 23.3 11.0 8 5 GDP implicit &flator (annual % chnge) 13.2 21.2 9.7 7 0 -0-GDP -GCPpec capta E x d a n F rate (annual average,local per US$) 2.0 4.1 15.0 19 0 Terms of trade index(2000 = 1a)) 129 100 92 1980-90 1990-2000 2 0 0 0 4 7 (werage amualgroMh %j Population, mid-year(milions) 3.6 4 9 6 4 7 5 3.1 2.8 2 2 GDP (US$ millions) 2,566 3,049 7,106 12,279 2.7 3.2 5 1 (% of GDP) Agriculture 23.7 z 4 15 9 13 5 2 7 2 2 3 6 Industry 24.3 264 32 5 28 3 3 3 3 6 4 1 Manttaduing 15.0 16 3 22 7 20 3 3 7 4 0 5 8 Services 52.0 51 2 51 7 56 2 2 5 3 6 6 1 Household final consumptim expenditure 69.4 E68 85 9 94 8 2 6 3 0 5 4 General gov't final consumption apmditue 12.7 12 9 16 3 20 1 3 3 2 0 5 2 Gross capitalfamation 24.8 230 25 6 37 3 3 0 6 5 4 8 Exprts d goods a d services 37.2 372 54 2 51 7 1 1 1 6 7 7 Imports of gods and smices 44.1 389 65 9 78 1 1 2 3 8 7 5 Gross savings 13.2 21 7 22 4 20 4 Note Figuresin italics are for years dher thanthcse specified 2m7 dsta are preliminary Group data are through 2006 indcates data are not available a Aid dataarefor 2005 Development Economics, DevelopmentData Group (DECDG). 95 Balance of Payments and Trade 2000 2007 (US$ rnllfons) IGovernanse indicators, 2000 and 2008 I Total merchandise exports (fa) 1,436 5,594 Total merchandise impds (cif) 2,856 8,556 Voim and aCcountabillty Net trade in goods and s e ~ c e s -831 -3,249 Pdtbca stabllty Current accolnt balance -508 -1,225 as a % of GDP -7.2 -10.0 Regulatoryqualty Workers' remittances and Ruleof law wmpensation of employees(receipts) 416 2.561 Controlof cortupbon Reserves includng @Id 1,319 2,733 0 25 50 7 5 Central Government Finance Q2w6 Country'spercenUeiark (0-100) 02oOO h@w vsllee mpiy belairwngr (% ofGDP) Curlent revenue (indudinggrants) 15.1 18.6 lsourne KaUfmann-Kmay-MastNZz World Bank Tax revenue 13.8 16.2 Curmnt expenditure 14.8 16.9 Technology and Infrastructure 2000 2005 Overall surplusldefiat -5.2 -2.1 Paved roads (Ohof total) 20.4 Highest margind tax rate (%) Fixed line and motile ptune lndivldual 25 25 subscribers (per 1,000people) Corporate 15 25 High tectnologyexprts (YOof manufacturedexports) 0.3 2 2 External Debt and Resource Flows Environment (US$rnllfons) Total debt outstanditq ard disbursed 5,360 2,259 Agricultural lard (%of lard ama) 26 26 Total debt service 389 Folest =ea (YOof land area) Debt relief (HIPC MDRI) 688 Nationally protectedareas (% d land area) Total debt (%of GDP) 75.4 184 Freshwaterreswrces percaplta (cu meters) 13,311 Total debt service (% of exports) 20 7 Freshwaterwithdrawal (YOof internalresources) 0 9 Foragn drect investment (net inflows) 282 674 C02emissions p r capita (mt) 0 78 0 94 Portfolio equity (net inflows) 0 -21 GDP per unit d energy use I (2000 PPP $per kg of al equvalert) 6 1 5 5 Ccmposltimoftotal external debt 2005 IQRD 0 IRD la4 1353 Energy use per capita (kg d oil equivalent) 469 518 World OUP 2000 2006 IMF 158 (US$ mllions) IBRD Total debt outstanding and disbursed 151 0 Disbursemerts 0 0 Principd repyments 27 70 Interest payments 15 3 O h U multi. lateral 1040 IDA Total debt outstandingand disbursed 838 1353 Disbursemerts 38 15I Private Sector Development 2000 2006 Total debt service 8 18 Time requiredto start a business(days) 21 IFC g c a l year) Cost to stai a business (% of GVIper capita) 59.9 Total disbursedand outstanding portfolio 42 2 Time requiredto regbter poperty (days) --- 24 of which IFC own acwunt 27 2 Disbursernerts for IFC own accourt 9 0 Ranked as a maja wnstraht to business Pdfolio sales, prepayments ard (% of managerssweyed who agreed) repaymentsfor IFC ownacwunt 26 1 Corruption .. 62.7 Access tolwst of finanang .. 62.4 MlGA Grossexpsure 16 0 Stock msket capitalization(%of GDP) 8.8 New guarantees 0 0 Bank capital to asset rafio (%) 8.8 8.4 Note Figuresin italics arefor years dherthanthcse spcified 2007 data we pelimimry 7/7/08 indcates data are not available -indicatesobsewaeon is not tpplicable Development Ewnomcs. DevelopmentData Group (DECDG) 96 89°W 88°W 87°W 86°W 85°W 17°N 17°N BELIZE Caribbean Sea HONDURAS Roatán L A B A H I A Gulf of Honduras 16°N I S L A S D E 16°N Trujillo Iriona Puerto Cortés Tela La Ceiba Corocito Corocito Barra Patuca Balfate Balfate Brus GUATEMALA Laguna C O R T E S AT L Á N T I D Ambre e E d de Dio Dioss C O L Ó N speranza Tocoa La La Lago de San Pedro San Pedro Nombre Aguan Sonaguera Sonaguera ra Paulaya M Ahuas Ahuas Izabal SulaSula El Progreso El Progreso Cordillera Cordillera NoOlanchito Olanchito q Quimistan Quimistan Las Vegas Las egas u Morazán Morazán Siero o s El Carbón El Carbón G R A C I A S it Puerto i Lempira Higuerito Higuerito Y O R O Sic a Nuevo Nuevo Embalse General Sirsirtara Sirsirtara Arcadia Arcadia S A N TAUlúa A D I O S San Esteban San Esteban Francisco Morazán Yoro oro Dulce Nombre Dulce Nombre 15°N B Á R B A R A Sulaco de Culmí de Culmí 15°N C O P Á N SantaSanta O L A N C H O Colón del Patuuca ca BárbaraBárbara Lago de Catacamas Catacamas Copán Ruinas Copán Ruinas Salamá Salamá Santa Rosa Santa Rosa Yojoa San Luis San Luis de de Copán de Copán Humuya Guayape Pat Awasbila wasbila To Jaitique Jaitique To Chiquimula GraciasGracias Puerto de Montaña JuticalpaJuticalpa Cabezas O C O T E - Cedros Cedros Montañas CerroCerro ComayaguaComayagua COMAYAG Guaimaca Guaimaca Las Minas Las Minas Comayagua Montañas Nueva P E Q U E (2,870 m) (2,870 m) LaLa UA Ocotepeque EsperanzaEsperanza O L E M P I R A La Paz La Paz Guyaambre To Valle de alle de San Salvador Mapulaca Mapulaca INTIBL A PA Z UCÁ Marcala Marcala CISCZAN Jalán Angeles Angeles EL PARAÍSO EL ARAÍSO Coco N 14°N TEGUCIGALP TEGUCIGALPA Camasca Camasca RA DanlíDanlí 14°N O Yuscarán uscarán Sabana Sabana HONDURAS EL SALVADOR To FRAM Las Manos Las Manos San Miguel Grande Grande SELECTED CITIES AND TOWNS VALLE ALLE NICARAGUA To DEPARTMENT CAPITALS To Nacaome Nacaome Estelí San Marcos San Marcos San Salvador San Lorenzo San Lorenzo de Colón de Colón NATIONAL CAPITAL Choluteca Choluteca 0 20 40 60 80 100 Kilometers RIVERS PAN AMERICAN HIGHWAY de Fonseca C H O L U T E C A 0 20 40 60 Miles MAIN ROADS IBRD FEBRUAR 13°N Golfo El Triunfo El TriunfTriunfo 13°N This map was produced by the Map Design Unit of The World Bank. PACIFIC OCEAN To RAILROADS Managua The boundaries, colors, denominations and any other information 33418R1 shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any Y DEPARTMENT BOUNDARIES 2008 endorsement or acceptance of such boundaries. 89°W 88°W 87°W 86°W 85°W INTERNATIONAL BOUNDARIES