Public Disclosure Authorized




                                                                              Document o ...
CURRENCY EQUIVALENTS
                           (Exchange Rate Effective December 3 1,2007)

                             ...
FOR OFFICIAL USE ONLY

                                                        DOMINICAN REPUBLIC
                        ...
Annex 1: Sector Background        ...........................................................................................
DOMINICAN REPUBLIC

              ELECTRICITY DISTRIBUTION REHABILITATION PROJECT

                            PROJECT APP...
4nnual     5.00     10.50     10.50     10.50      5.50      0.00      0.00      0.00      0.00
Cumula     5.00     15.50 ...
Environmental Assessment (OP/BP 4.0 1)

Significant, non-standard conditions, if any, for:
Re$ PAD C. 7
Board presentation...
I.       STRATEGIC CONTEXT AND RATIONALE

A.       Country and sector issues

Country Economic Overview

1.     In the aft...
4.      Sector reform started in the early 1990s with the opening up o f generation to private
investors. A central step w...
Current Electricity Sector Issues and Strategy

8.     The most serious and urgent issue s t i l l facing the sector i s t...
13.    With the help o f the police forces under the Anti-Fraud Program (PAEF)', an anti-theft
campaign focused o n large ...
17.      Additional significant progress will require the combination o f investments and
community outreach that have beg...
to stabilize power supply by providing an adequate level o f subsidy to the sector (particularly the
EDEs), improving dist...
reducing the cost o f supply w o u l d complement the other efforts targeted at ensuring the financial
viability o f the e...
C.      Project components

31.     Component 1 - Rehabilitation and Upgrading o Medium and Low Voltage Circuits
         ...
abuse because responsibility w o u l d be focused o n the contractors; (b) Increasing the CRI
requires a broad approach li...
OFID. The contracts to be financed b y the Bank will be co-financed 25 percent by the
Government.

B.     Institutional an...
o f electricity service provided, and consumer satisfaction. In addition, the project includes
consultancy on how to handl...
I                       I     EdeNorte          I   EdeSur     I     EdeEste      I
             June 2008                ...
do not pay for electricity at all or pay only a flat fee. Based o n experience, the EDEs have
estimated this reduction in ...
C.      Fiduciary

53.     A procurement capacity assessment carried out by the Bank found that while UERS and
EDE staff a...
E.     Environment

57.      The environmental benefits from removing a large number o f the illegal wires on city
streets...
Annex 1: Sector Background
          DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project


The Electricity...
regulate the sector. The National Energy Commission (Comisidn Nacional de Energia, CNE),
composed o f the Secretary o f In...
cross subsidies from other tariff categories, so as to limit the growth o f the Stabilization Fund;
this, however, rendere...
during the coming months because o f lags in the system (electricity bills reflect fuel imported a
few months earlier).

 ...
month as it was showed in some cases studied by EdeEste. Some o f the most benefited have
been the owners o f small busine...
Reduced violence on women;
           Increase in educational levels o f the household, particularly for children who can ...
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies
         DOMINICAN REPUBLIC: Electricity Distri...
Annex 3: Results Framework and Monitoring
          DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project

1...
2.      The UERS (a part o f CDEEE) and key staff from the EDEs, with the assistance of
project-financed consultants, will...
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Prestamo BM 2008 para rehabilitacion redes RD

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Pjto Bm Rehabilitacion Redes

  1. 1. Public Disclosure Authorized Document o f The World Bank FOR OFFICIAL USE ONLY Report No: 4 1899-DO Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN Public Disclosure Authorized I THE AMOUNT OF N US$42.0 MILLION EQUIVALENT TO THE DOMINICAN REPUBLIC FOR AN ELECTRICITY DISTRIBUTION REHABILITATION PROJECT April 18, 2008 Public Disclosure Authorized Sustainable Development Department Caribbean Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only i n the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
  2. 2. CURRENCY EQUIVALENTS (Exchange Rate Effective December 3 1,2007) Currency Unit = Dominican Republic Peso (RD$) 33.75RD$ = US$l FISCAL YEAR January 1 - December 3 1 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CDE Corporacion Dominicana de Electricidad (the former Dominican Electricity Corporation) CDEEE Corporacion Dominicana de Empresas ElCctricas Estatales (state-owned utility holding company) CNE Cornision Nacional de Energia (National Energy Commission - in charge o f policy making) C RI Cash Recovery Index =(kWh billed by EDEskWh purchased by EDEs)*(RD$ paid by consumers to EDEs/RD$ billed by EDEs to consumers) EDEs Empresas Distribuidoras de Electricidad ( the three regional distribution companies) EGEHID Empresa de Generacion Hidroelectrica Dominicana (state-owned hydgrogeneration company) EdeEste Empresa Distribuidora de Electricidad del Este S.A. (privately-owned EDE for eastern DR) EdeNorte Empresa Distribuidora de Electricidad del Norte S.A.(state-owned EDE for northern DR) EdeSur Empresa Distribuidora de Electricidad del Sur S.A. (state-owned EDE for southern DR) ETED Empresa de Transmision del Estado Dominicano (state-owned transmission company) FDI Foreign Direct Investment FONPER Fondo Patrimonial de las Empresas Reformadas (Equity Fund for Companies) GDP Gross Domestic Product IDB Inter-American Development Bank IFR Interim Financial Reports IMF International Monetary Fund IPP Independent Power Producer LAC Latin America and Caribbean oc Organism0 Coordinador del Sistema ElBctrico Interconectado (responsible for load dispatch) OFID OPEC Fund for International Development PAEF Programa Nacional de Apoyo a la Elimination del Fraude ElBctrico (anti-fraud program) PRA Programa Nacional de Reduccibn de Apagones (National Program for Reduction o f Blackouts) PPA Power Purchase Agreement PROTECOM Oficina de Proteccion a1 Consumidor de Energia E16ctrica (Consumer Protection Agency for Power) SEH Secretaria de Estado de Hacienda SEMARN Secretaria de Estado de Medio Ambiente y Recursos Naturales (Secy. o f State for Environment) SIE Superintendencia de Electricidad(Office o f the Superintendent o f Electricity) TA Technical Assistance UERS Unidad de Electrification Rural y Suburbana (Rural and Suburban Electrification Unit) V i c e President: Pamela Cox Country Director: Yvonne M. Tsikata Country Manager Christina Malmberg Calvo Sector Manager: Philippe Benoit Task Team Leader: Lucio Monari
  3. 3. FOR OFFICIAL USE ONLY DOMINICAN REPUBLIC Electricity Distribution RehabilitationProject CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE .............................................................. 1. A. - 1- Country and sector issues................................................................................................ B. Rationale for Bank involvement ..................................................................................... - 6 - C. Higher level objectives to which the project contributes ............................. 11. PROJECT DESCRIPTION .................................................................................. .......-7 - A. Lending instrument ......................................................................................................... -7- B. Project development objective and key indicators.......................................................... -7- C. Project components ......................................................................................................... - 8 - D. Lessons learned and reflected in the project design........................................................ -8- E. Alternatives considered and reasons for rejection .......................................................... - 9 - 111. IMPLEMENTATION ..................................................................................... .............- 9 - A. Partnership arrangements ................................................................................................ -9- B. Institutional and implementation arrangements ............................................................ - 10 - C. Monitoring and evaluation o f outcomeshesults............................................................ - 10 - D. Sustainability ................................................................................................................. - 10 - E. Critical risks and possible controversial aspects........................................................... - 11 - F. Loadcredit conditions and covenants ........................................................................... - 11 - IV. APPRAISAL SUMMARY ......................................................................................... - 12 - A. Economic and financial analyses .................................................................................. - 12 - B. Technical ....................................................................................................................... - 13 - C. Fiduciary ................................. .................................................................................. 14 - D. Social ............................................................................................................................. - 14 - E. Environment................................................................................................................ ..- 15 - F. Safeguard Policies ......................................................................................................... - 15 - G. Policy Exceptions and Readiness .................................................................................. - 15 - This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization.
  4. 4. Annex 1: Sector Background .................................................................................................. 16 . Annex 2: M a j o r Related Projects Financed by t h e B a n k and/or other Agencies .............. 22 . Annex 3: Results Framework and Monitoring ..................................................................... 23 . Annex 4: Detailed Project Description ................................................................................... 30 . Annex 5: Project Costs ............................................................................................................ 36 . Annex 6: Implementation Arrangements .............................................................................. 37 . Annex 7 : Financial Management and Disbursement Arrangements .................................. 42 . Annex 8: Procurement Arrangements ................................................................................... 55 . Annex 9: Economic and Financial Analysis .......................................................................... 62 . Annex 10: Safeguard Policy Issues ......................................................................................... 80 . Annex 11: Project Preparation and Supervision .................................................................. 83 . Annex 12: Documents in the Project F i l e .............................................................................. 84 . Annex 13: Statement o f Loans and Credits............................. .............................................. 85 . Annex 14: Country a t a Glance .............................................................................................. 86 . Annex 15: M a p IBRD 35856 ................................................................................................... 88 .
  5. 5. DOMINICAN REPUBLIC ELECTRICITY DISTRIBUTION REHABILITATION PROJECT PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSEG Date: April 18,2008 Team Leader: Lucio Monari Country Director: Yvonne M. Tsikata Sectors: Power (100%) Sector ManagedDirector: Philippe Charles Themes: Infrastructure services for private Benoit sector development (P) Project ID: PO89866 Environmental screening category: Partial Assessment Lending Instrument: Specific Investment Loan [XI Loan [ ] Credit [ ] Grant [ 3 Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 42.00 Proposed terms: Commitment-linked payable in 30 years, including 5 years o f grace and level DrinciDal reDavment: at six-month LIBOR Dlus fixed mead. Borrower 4.90 6.40 10.50 International Bank for Reconstruction and 16.50 25.50 42.00 Development Other Financiers 37.30 61.50 99.60 Total: 58.70 93.40 152.10 Borrower: CDEEE, Dominican Republic Responsible Agency: EdeNorte, Dominican Republic EdeSur, Dominican Republic EdeEste, Dominican Republic
  6. 6. 4nnual 5.00 10.50 10.50 10.50 5.50 0.00 0.00 0.00 0.00 Cumula 5.00 15.50 26.00 36.50 42.00 0.00 0.00 0.00 0.00 Live Project implementation period: Start May 31,2008 End: M a y 31,2012 Expected effectiveness date: July 1,2008 Expected closing date: December 3 1,20 12 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XI No Ref: PAD A.3 Does the project require any exceptions from Bank policies? Ref: PAD D. 7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 I s approval for any policy exception sought from the Board? [ ]Yes [ IN0 Does the project include any critical risks rated “substantial” or “high”? [x]Yes [ ] N o Ref: PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [xlYes [ No Ref: PAD D. 7 Project development objective Ref: PAD B.2, TechnicalAnnex 3 The Project development objective i s to: (a) increase the Cash Recovery Index o f the three electricity distribution companies in selected areas and (b) improve the quality o f electricity service. Project description [one-sentence summary o each component] Ref: PAD B.3.a, Technical f Annex 4 Component 1 - Rehabilitation o f Distribution Networks (US$121.8 million excluding contingencies) in selected areas o f EdeNorte, EdeSur and EdeEste. This would be a time slice o f the three EDEs investment program in rehabilitation and upgrading o f medium and l o w voltage circuits by: (i) replacing existing run-down and aged medium and l o w voltage overhead lines; (ii) expanding distribution substations and feeders; (iii)replacing and installing meters, cables and transformers, and new connections for those customers who have irregular connections; (iv) for large consumers, installing remote meters; and (v) in areas difficult to manage, installing theft-proof equipment. Component 2 - Outreach to Consumer Communities (US$9.2 million excluding contingencies)) receiving Component 1 investments, in order to re-establish trust and define clear rules between them and the EDEs, in the context o f the “24-Hours o f Light Program” o f improving power supply in areas where the C R I i s rising. Component 3 - Technical Assistance (US$2.5 million) for consultants to: (a) confirm the amounts and legal status o f the EDEs’ debts, define options for i t s restructuring, and prepare a plan of execution; (b) carry out audits on the performance o f the contractors on the project works, the achievement o f project performance indicators, and the flow o f funds provided by the Government to the sector; (c) survey customer satisfaction with the quality o f electricity service in the rehabilitated circuits; and (d) help administer, monitor and evaluate the project. Which safeguard policies are triggered, if any? Ref: PAD D.6, TechnicalAnnex 10
  7. 7. Environmental Assessment (OP/BP 4.0 1) Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: None. Loadcredit effectiveness: Loan effectiveness contingent upon the execution o f the subsidiary agreement between Government and CDEEE, and the agreements between CDEEE and each o f the three EDEs. Covenants applicable to project implementation: Specific target levels for the CRI and for controlling increases in operating costs have been agreed with the EDEs (see table page 12). The EDEs agreed t o limit the increase in their annual operating costs (excluding taxes depreciation, fees to CNE, OC and SIE, and allowances for uncollectible bills) to half the percentage o f the increase o f the total energy bills (in GWh) issued, adjusted for inflation. In case any o f the EDEs are unable to achieve these targets, they will, j o i n t l y with UERS, submit a plan to the Bank to improve the indicator in the following six months. In case such improvement does not materialize, the Bank would have the right to suspend disbursement. 0 Standard Financial Management covenants. ... - 111-
  8. 8. I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues Country Economic Overview 1. In the aftermath o f the banking and macroeconomic crises o f 2003 and 2004, the Dominican economy experienced a booming recovery in 2005 and 2006, with real GDP growth reaching 9.3 percent and 10.7 percent, respectively. Economic growth continued i t s strong pace in 2007, averaging 8.2 percent in the first nine months. Macroeconomic stability improved markedly following the crisis period. Inflation was brought under control, from 51 percent in 2004 to single digits in 2005 and 2006 despite rising world oil prices. With the implementation o f the Government’s macro stabilization program supported by the IMF Stand b y Arrangement, the exchange rate stabilized at RD$33/US$ in 2006 (close to where it remains today), compared to the depreciated value o f RD$49/US$ in early 2004. 2. As the Dominican Republic looks forward, the resolution o f the prolonged electricity crisis i s very important for improving the competitiveness o f the country and ensuring sustained economic growth and poverty reduction. The large fiscal burden imposed by the sector through direct and indirect subsidies crowds out much needed social expenditures, while blackouts and high consumer outlays for alternative self-generated electricity’ raise production costs, ultimately dissuading investments and reducing competitiveness. In a sector troubled by large theft o f electricity, often with official connivance, mitigating this problem would also improve accountability and governance in the country. Electricity Sector Background 3. For decades, the electricity sector has provided substandard service, with inadequate generation capacity (until recently) and frequent power cuts. The historical roots were a combination o f politics, corruption and the inefficiencies o f a state-owned monopoly. At times, the problems have boiled over into national crises. Over the past decade, the Government has restructured the sector and made major progress in most areas. Reducing the high level of technical and commercial losses in the distribution system and improving the poor quality o f power supply are the most urgent issues that s t i l l need to be addressed to put the sector on a sound financial and technical footing. These issues are locked in a vicious circle, as poor quality o f service, customer dissatisfaction and high tariffs2 have induced theft through illegal connections and non-payment o f electricity bills by businesses and households, at times with the connivance o f staff o f the distribution companies. This, in turn, has l e f t the distribution companies without the resources to make the necessary improvements. The problem has been compounded by the difficulty o f cutting o f f supplies for overdue bills, together with the impunity with which consumers reconnect to the grid illegally. The result i s known somewhat facetiously as “ l a cultura de no pago”. A major objective o f this project i s to help change this culture. I In 2004, the total economic cost was estimated at over US$1 billion or 3.4 percent o f GDP. * Average tariff i s US$O.ZO/kWh, with average residential rate at US$O. 16/kWh, industrial rate at US$0.23/kWh, and commercial at US$0.29/kWh. A major reason for needing high tariffs i s the wide-scale theft o f electricity. -1-
  9. 9. 4. Sector reform started in the early 1990s with the opening up o f generation to private investors. A central step was the 1997 unbundling o f Corporacidn Dominicana de Electricidad (CDE), the vertically integrated power utility, into two generation companies (Itabo and Haina) and three regional electricity distribution companies (EDEs): EdeNorte, EdeSur and EdeEste. These companies were subsequently privatized through the sale o f 50 percent shareholding (including control), with the remaining shares held by the Fondo Patrimonial de las Empresas Reformadas (FONPER), to be managed as an investment rather than a potential sector policy instrument. The July 2001 Electricity L a w created a modern legal and regulatory framework along with new institutions to formulate energy policy and regulate the sector. Nevertheless, as in many other countries, the path o f reform has not been smooth. 5. Generation and Transmission. Today there are 12 private thermal generators3 with a nominal installed capacity o f 2,695 M W (85 percent o f the total). Almost half o f this total power capacity is, however, old and inefficient, mainly based on diesel oil. The remaining capacity (468.4 MW) i s mainly hydropower owned by EGEHID, a newly-established subsidiary o f the Corporacidn Dominicana de Empresas Ele'ctricas Estatales (CDEEE), the state-owned utility holding company; another subsidiary (ETED) owns the transmission assets4. The establishment o f EGEHID and ETED was important to promote a level playing field in the sector and ensure transparency o f accounts. Within CDEEE, the Unidad de Electrificacidn Rural y Suburbana (UERS) i s responsible for carrying out rural electrification projects that are handed over to the EDEs; i t would be the implementing unit for the proposed project. Two independent power producers (Smith and Enron, and CESPM) sell electricity directly to CDEEE through long-term power purchase agreements (PPAs), while the other generation companies sell about 80 percent o f their electricity to the EDEs under bilateral contracts, and the remainder on the spot market. The country peak demand met in 2006 was 1,760 MW5. 6. Distribution. The three EDEs supply electricity to all regulated customers and to a fraction o f the 40-50 non-regulated (demand higher than 2 MW) consumers. EdeEste has remained in the private sector6, while EdeNorte and EdeSur were sold back to the Government by Unidn Fenosa o f Spain in 2003. The companies each have about one-third o f the market, but EdeSur has the most industrial and commercial users, followed by EdeEste, as they divide the Santo Domingo market. All have been unprofitable and are deeply in debt. 7. Policy and Regulatory Institutions. The Comisidn Nacional de Energia (CNE), composed o f the Secretary o f Industry and Commerce, Secretary o f Finance, Technical Secretary o f the Presidency, Director o f the Central Bank, and Secretary o f Agriculture, i s in charge o f energy policy. The sector regulator i s the Superintendencia de Electricidad (SIE), headed by a council o f three members (one o f whom i s the Superintendent) appointed by the President and ratified by Congress. There i s also an OJcina de Proteccidn a Consumidor (PROTECOM) 1 under SIE. The Organism0 Coordinador (OC) i s responsible for load dispatch. AES Andres, CEPP, DPP, GPLV, HAINA, ITABO, METALDOM, Monte Rio, SEABOARD, CESPM, MAXON, and Smith Enron. The transmission company ETED owns 2144 km at 138 kV, 1528 km at 69 kV, 19 transforming substations 138/69 kV, total transforming capacity 2305 MVA 5 Given that demand has been constrained for a long time, the unconstrained peak load i s almost certainly greater. 6 EdeEste, originally owned by AES, was sold to TCW (an equity fund) in November 2004, with AES maintaining the operatorship under a management contract. -2-
  10. 10. Current Electricity Sector Issues and Strategy 8. The most serious and urgent issue s t i l l facing the sector i s the unsustainable financial condition o f the EDEs, which are expected to require an additional cash infusion o f over US$SOO million just to meet their 2008 deficit. As usual, a problem this severe has a number o f adverse effects as well several causes, all o f which need to be addressed. 9. The estimated availability o f power supply increased from below 70 percent o f demand in 2004 to over 80 percent by 2006, before falling back a bit in 2007. While there are occasional shortages o f generation capacity and, in some places, bottlenecks in transmission, the main constraint i s the shortage o f funds by the EDEs to purchase enough energy to meet the total demand. The EDEs ration supply on commercial principles, providing more to those areas where they get the highest returns. 10. The Government has provided large subsidies (about US$600 million in both 2005 and 2006, and US$720 million in 20077), as loans from CDEEE with no specified terms, to ensure stability o f power supply, and has remained current on the payment o f electricity bills by Government agencies. While this has enabled the EDEs to return to relatively normal operation after the crisis o f 2003-04, it has exacerbated the Government’s fiscal problems and has also left the EDEs with a combined debt overhang o f some US$2.1 billion, and a negative net worth o f some US$1.2 billion, which o f course makes them unable to raise funds from commercial sources. Resolution o f the situation has been complicated by the fact that one o f the EDEs i s private (and i s engaged in a legal action against the Government related to i t s financial situation) while two are public. The project will include technical assistance to clarify the exact amount and legal status o f different debt components, and to study the options for resolving the debt problem through some combination o f capitalization, cancellation and re-financing. 11. The shortage o f funds has also led to underinvestment and consequently deteriorating networks. In 2005 and 2006, the Government provided some US$63 million and US$38 million, respectively, that was supposed to go for investment; however, much o f this went instead into working capital that was essential for continuing operations. In 2007, it provided some US$53 million that was spent on investments by the EDEs, which enabled them to begin some rehabilitation under the “24 Hours o f Light Program” (see below). Government has agreed to increase this to US$75 million in 2008 and US$80-100 million in each o f 2009 and 2010, including financing from Bank and other donors under the project. 12. In 2003, when the Government took back the operation o f EdeNorte and EdeSur from the private sector, there were substantial disruptions due to the change in management and some ill-advised appointments. In 2006, the Government appointed more experienced local and international managers in these two companies, with contracts linked to performance. All three EDEs have also reorganized their internal structures and laid o f f obstructive employees. The benefits are starting to show in improved collection performance. This has required increased operating costs, but these will also now need to be kept under control in the effort to return to profitability. Operating costs will be monitored under the project. 7 Subsidies were larger than originally envisaged due to a combination o f higher o i l prices and unsatisfactory performance o f the EDEs, particularly in 2005.
  11. 11. 13. With the help o f the police forces under the Anti-Fraud Program (PAEF)', an anti-theft campaign focused o n large consumers has been launched. The number o f inspection teams has increased and EdeNorte and EdeSur have acquired n e w technology in the f o r m o f remote meter reading equipment to monitor continuously the consumption o f large industrial consumers, so as to easily detect manipulation and theft. Experience with these devices has been positive so far. The proposed project w o u l d expand the program to install remote meter reading by EdeEste and to large commercial and residential users by all three EDEs. In August 2007, the Congress approved amendments to the Electricity Law, t o criminalize electricity theft. 14. Electricity tariffs in the Dominican Republic (currently averaging U S $ l 8 / M W h ) are among the highest in L a t i n America, due to the (a) reliance o n imported o i l for power generation, (b) high prices originally negotiated in the PPAs, (c) limited amount o f competition, in this small, island economy, (d) high commercial risks facing operators, especially given the repeated sector financial crises, and (e) l o w CRI, w h i c h requires higher tariffs o n those who pay to help offset the losses due to theft o f electricity. Over the next f e w years, the Government hopes to lower generation costs by converting an existing power complex f r o m diesel to natural gas, contracting new plants based o n coal, and renegotiating the PPAs. 15. In late-2007, the Government decided to freeze retail tariffs, despite the increase in o i l prices (fuel o i l rose f r o m US$40/bbl in May 2007 to US$56/bbl in September 2007) which would have required an average adjustment by about 15 percent. It feared that a further increase would result in larger non-payment o f electricity bills, thereby counteracting the ongoing efforts to increase the CRI. But financial projections show that unless the indexed tariffs called for in the regulations are restored, it will be impossible for the EDEs t o achieve financial self-sufficiency, even if the project and other measures being taken and planned achieve fully their objectives. An improvement in the quality o f power supply, w h i c h i s an objective o f the project, would create more favorable conditions for the Government to adjust tariffs in line with fuel prices. 16. The Cash Recovery Index (CRI) i s the key indicator o f the percentage o f power purchased by the EDEs that i s paid for by consumers9. I t i s monitored closely by the Government, and targets are set under the project as well. The CRI in the Dominican Republic i s one o f the lowest in the world; technical losses are high due to obsolete equipment, commercial losses are even higher due t o illegal connections, and many customers do not even pay the bills they receive. The CRI improved f r o m 45 percent in 2004 t o 52.8 percent in 2005, then stagnated until mid-2006, when i t resumed rising. I t i s n o w around 60 percent, with m u c h o f the improvement due to factors mentioned above (better management; PAEF; resumption o f investments). This is, however, s t i l l w e l l below the level o f operational breakeven o f 70-75 percent (assuming indexed tariffs are restored), and even farther f r o m the 80-90 percent reached in a number o f other L a t i n American countries, the achievement o f w h i c h w o u l d allow a reduction in tariffs. 8 The Programa Nacional de Apoyo a la Eliminacidn del Fraude Ele'ctrico i s a joint Government-EDEs program to detect and prevent electricity fraud. 9 The formula is: (kWh billed by EDEs /kWh purchased by EDEs) multiplied by (RD$ paid to EDEs by consumers /RD$ billed by EDEs to consumers). -4-
  12. 12. 17. Additional significant progress will require the combination o f investments and community outreach that have begun under the “24 Hours o f Light Program” and will be expanded and improved under the project. Since 2006, the EDEs have offered to increase the hours o f electricity delivered to various circuits as the C R I in those areas rise. The l o w voltage circuits are divided into four categories (A, ByC and D), according to their C R I levels (above 90percent, 65 to 90 percent, 52 to 65 percent, and less than 52 percent), which receive decreasing number o f hours per day o f service (24, 21, 18 and less than 18, respectively). At present, about 210 circuits out o f 492 in the country are classified as category A, 50 as B, 90 as C and 142 as D. As the C R I in a circuit rises, the applicable category and therefore the hours o f service are increased progressively. The EDEs’ goal i s to upgrade all distribution circuits to category A over the next decade. This involves regularizing the connections to illegal users and rehabilitating the network through replacement o f old equipment (which will improve the quality o f power supply b y reducing voltage fluctuation, and reduce technical losses). Given the overall poor status o f the network, and the underinvestment in the past, virtually the entire distribution system need to be rehabilitated. 18. A key to the success o f this program i s outreach to local communities. For this, the EDEs have created Social Units, comprised o f social experts, working closely with NGOs and universities. A Sectoral Social Management Committee composed by representatives o f CNE, PROTECOM, UERS and the EDEs, has also been created, to share experiences and homogenize criteria and methodologies for implementation o f social programs. The Social Units have developed community participatory methodologies to engage civil society in the solution o f the energy crisis. These revolve around Social Action Plans which include campaigns o f information and communication about the electricity services, educational activities and signing o f Social Agreements (Pactos Sociales) with communities. 19. The “24 Hours o f Light Program” i s proving to be a win-win solution for EDEs and consumers. For example, in the 26 circuits where EdeNorte implemented i t during the first half o f 2007, the number o f regularized consumers increased from 45,000 to 160,000. Some case studies by EdeEste found that the cost for alternative sources o f energy has been reduced for consumers b y between 15 and 56 percent, with small businesses the greatest beneficiaries. A survey by EdeEste, which has so far signed 49 Social Agreements, found consumer satisfaction with electricity service rose from 60 percent to 80 percent in the areas covered, with important improvements in fields as diverse as neighborhood security, household income, and family time together. EdeSur i s only starting to implement this approach. 20. The project represents a major acceleration o f this effort. I t will also reduce the costs and improve the performance o f the program by (a) achieving economies o f scale and more competition in procurement, (b) introducing “supply and installation” contracts, (c) incorporating the best practices o f the three EDEs in terms o f both investments and community outreach, and (d) having robust monitoring and evaluation so that lessons are learned and mistakes corrected faster. 21. The Government published a comprehensive sector plan for 2006-12, which aims to ensure the provision o f reliable electricity services at reasonable prices to the entire population, by improving the financial viability o f the sector while continuing i t s expansion to meet the rapidly increasing demand fueled by robust economic growth. In the short term, the plan seeks -5-
  13. 13. to stabilize power supply by providing an adequate level o f subsidy to the sector (particularly the EDEs), improving distribution infrastructure, and controlling operating costs. Investments would be made in transmission to remove major supply bottlenecks. A L a w for Renewable Energy has been approved to provide incentives for renewable projects and facilitate their implementation by the private sector. 22. In the medium term, the plan aims to ensure financial sustainability and address the structural problems o f the sector. Actions would include restructuring o f the EDEs’ debts and better targeting o f subsidies, including revision o f the Blackout Reduction Program (Prograrna -- de Reduccidn de Apagones PR4) lo.Investments in generation, transmission and distribution would continue in order to meet growing demand at least cost. Rural electrification would be expanded to achieve universal accessll. A second generation o f reforms to ensure more competition at the generation level i s also being contemplated. In terms o f institutions, the plan calls for strengthening and further clarifying the roles o f the Government and i t s agencies, including CNE, SIE, and the OC. 23. Implementation o f this plan, supported by the Bank through the U S $ l 5 0 million Programmatic Power Sector Reform Loan (PPSRL) and the US$7.3 million Energy Sector Technical Assistance Loan (ESTAL), has not been without difficulties. An initial emphasis by the Government on generation delayed some o f the key actions to improve the distribution function. Implementation o f the ongoing Bank-supported projects has gained momentum since the 2006 Congressional election, reflecting the Government’s success in implementing i t s strategy. B. Rationale for Bank involvement 24. Through this project, the Bank would continue to support the improvement in the performance o f the sector and in particular o f the EDEs. While commercial banks and other donors are providing some funds for generation and renewable-energy projects, no private financing i s available for distribution because o f the EDEs’ financial problems. Such support i s essential to reduce the large fiscal cost o f the sector and enhance the competitiveness o f the economy. The project i s part o f the program indicated in the Country Assistance Strategy (CAS) approved in 2005 and the CAS Progress Report o f July 2007. The Bank has significant experience worldwide in loss-reduction projects. This experience, together with our ongoing policy dialogue in the country, will facilitate the project, lower investment costs through more efficient procurement, and catalyze co-financing from the IDB and the OPEC Fund for International Development (OFID). 25. The Bank has a well established and solid relationship with the Government through the ongoing PPSRL and ESTAL. Under these projects, the Bank i s assisting in formulating and implementing the strategy for the financial recovery o f the sector, and i s in a unique position to expand i t s assistance by focusing on distribution investments. These investments aimed a 10 The PRA was created in 2001 to provide limited electricity service for a minimum flat tariff to poor urban areas, to address the social unrest caused by widespread blackouts The program now accounts for about 10 percent o f the electricity sold and serves about half a million families. Pilot programs to rehabilitate the distribution system in the PRA areas and target subsidies are ongoing in EdeEste and EdeSur. I1 It i s estimated that 88 percent o f the population now has access to electricity. -6-
  14. 14. reducing the cost o f supply w o u l d complement the other efforts targeted at ensuring the financial viability o f the energy sector and strengthening i t s institutions. This project will be supplemented by a second Development Policy L o a n f o r the power sector planned for the next few years, following the PPSRL, to ensure consistency o f strategy and focus by the Government towards achieving financial sustainability. C. Higher level objectives to which the project contributes 26. The long-term competitiveness o f the Dominican economy depends o n improving the electricity supply. The unreliability and high cost o f electricity supplies has been a major disincentive for investments in the country, and has forced many existing companies to resort to much more expensive and inefficient sources o f energy. 27. The project will also contribute to improve the efficiency and cash recovery in the sector, and therefore reduce a major drain o n the budget. In b o t h 2005 and 2006, overall subsidies to sector operators topped US$600 m i l l i o n (1.7 percent o f GDP), in 2007 were US$720 million, and for 2008 are forecast at over US$800 million. As a result, the energy sector deficit severely exacerbates the country’s fiscal pressures. 11. PROJECT DESCRIPTION A. Lending instrument 28. The Bank will provide finance thru Specific Investment L o a n t o support a time slice o f the rehabilitation investments in the medium and l o w voltage circuits o f the EDEs. The project will cover about 100 individual circuits which provide about 35 percent o f the energy the EDEs supply (excluding the 10 percent that goes to PRA areas). The individual sub-projects will be started over t w o years, with implementation continuing for an additional one to t w o years. The loan will be borrowed by the Dominican Republic which will on-lend i t to CDEEE, through a subsidiary agreement. A project agreement between the Bank and CDEEE will spell out the latter’s responsibilities. CDEEE will then on-lend the loan t o the EDEs under three individual subsidiary agreements, whose terms will be intermediary between those o f commercial borrowings and the Bank loan. B. Project development objective and key indicators 29. The project development objectives are to (a) increase the Cash Recovery Index (CRI) o f the three EDEs and (b) improve the quality o f electricity service. 30. Achievement o f these objectives would be monitored through the following indicators: Increase in the C R I in circuits with project investments and in each EDE as a whole. Control o f operating costs o f the EDEs. Increase in consumers’ perception o f the quality o f electricity services. Increased hours/day availability o f power in the circuits with project investments and in each EDE as a whole. -7-
  15. 15. C. Project components 31. Component 1 - Rehabilitation and Upgrading o Medium and Low Voltage Circuits f (US$121.8 million, excluding contingencies - U S 3 7 million finance by IBRD) in selected areas o f EdeNorte, EdeSur and EdeEste. This will be a time slice o f the three EDEs’ investment program in this activity by: (a) replacing existing run-down and aged medium and l o w voltage overhead lines; (b) expanding distribution substations and feeders; (c) replacing and installing meters, cables and transformers, and new connections for those customers who have irregular connections; (d) for large consumers, installing remote meters; and (e) in areas difficult to manage, installing theft-proof equipment. The specific sub-proj ects have already been selected by the EDEs, based primarily o n the contribution they would make to improve the CRI. The allocation o f funds among the three EDEs was proposed to the Bank by CDEEE. The project would finance about 100 circuits - some 20 percent o f the circuits by number but carrying about 35 percent o f the total energy, as the greatest increase in the overall CRI i s expected to come from the circuits with a high density o f consumers, including commercial and industrial ones. 32. Component 2 - Outreach to Communities (US$9.2 million - US$3 millionfinance by IBRD) targeted to receive Component 1 investments, in the context o f the “24-Hours o f Light Program” in order to establish trust between the EDEs and consumers, and thereby increase consumers’ willingness to pay by regularizing illegal connections. This component will employ participatory methodologies comprising (a) diagnosis o f the socioeconomic characteristics o f the neighborhoods and their use o f electricity, (b) census o f users o f electricity service, differentiating regular clients, customers in default and illegal users, (c) design o f the “24 Hours o f Light Program” for that community, based on the social and technical diagnoses, (d) information dissemination about the costs o f power generation, transmission and distribution; the rights and obligations o f consumers and EDEs; payment o f bills, meter reliability, and consequences o f electricity theft, (e) education about rational, efficient and safe use o f energy, (f)signing o f a “Social Agreement” (Pacto Social) between the EDEs and the communities, and (g) monitoring and evaluation. Through the Social Agreement, the EDEs commit to provide electricity for additional hours, aiming as soon as feasible for 24 hours per day, and the communities commit to pay for electricity and to regularize illegal connections. 33. Component 3 - Technical Assistance and Training (US$2.5 million - US$2 million finance by IBRD) for consultants to: (a) confirm the amounts and legal status o f the EDEs’ debts, define options for i t s restructuring, and prepare a plan o f execution; (b) carry out audits on the performance o f the contractors on the project works, the achievement o f project performance indicators, and the flow o f funds provided by the Government to the sector; (c) survey customer satisfaction with the quality o f electricity service in the rehabilitated circuits; and (d) help administer, monitor and evaluate the project. D. Lessons learned and reflected in the project design 34. Project design has benefited both from the Bank’s extensive project and analytical work in infrastructure investment, and from i t s experience with the power sector in the Dominican Republic: (a) Project implementation should be based on Supply and Installation Contracts: Given the large scale o f the program, this approach would minimize the risks due to any lack o f coordination and implementation capacity o f the EDEs, and would be less subject to the risk o f -8-
  16. 16. abuse because responsibility w o u l d be focused o n the contractors; (b) Increasing the CRI requires a broad approach linked to applying better technology, improving quality o supply f and reaching out to local communities. The Government has already taken the 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 outreach to the local communities. The design and implementation o f the community participation programs have required the EDEs to hire social scientists and create social teams, and to mobilize support f r o m both the local governments and community-based NGOs. (c) Privatization has better prospects i it follows rather than precedes establishing f conditions for financial sustainability. The Dominican Republic has already gone through a round o f unsuccessful privatization o f the EDEs, and must therefore increase the CRI to at least the breakeven level before trying t o privatize again. E. Alternatives considered and reasons for rejection 35. (a) Lending directly t o the EDEs was rejected because they do not have the financial independence or sustainability to be borrowers o f the W o r l d Bank loan; furthermore, there are economies o f scale in procurement f r o m having C D E E E be the coordinating agency. (b) Approving individually a l l o f the sub-projects to be financed w o u l d be unfeasible given that there would be about 100 such circuits, and the priorities might change during the course o f project implementation; instead, the Bank has reviewed the documentation o n all o f the proposed investments and visited a sample o f them, to evaluate the EDEs’ capacity t o design their own programs, and assess whether the sound criteria adopted t o select sub-projects have been consistently applied. (c) Insisting that the EDEs be re-privatized first w o u l d be unfeasible given their history and current lack o f financial solvency. (d) Financing equipment to be installed by the EDEs themselves throughout their concession areas, as has been done to date with Government funds, w o u l d provide more flexibility to the EDEs’ management, but would be more difficult to monitor and evaluate, be more vulnerable to the risk o f abuse, and require good implementation capacity by the EDEs to avoid delay. (e) Broadening the project to include all o f the investments by the EDEs, including n e w substations and other expansions as w e l l as improved corporate systems, w o u l d have required considerably more B a n k time and resources, and diluted the project’s focus. 111. IMPLEMENTATION A. Partnership arrangements 36. The project i s expected to be co-financed with the IDB and OFID, so as to enable more resources to be provided than the Bank could lend for the project o n i t s own. Because o f the complexity in co-financing individual contracts (more countries are eligible to bid under Bank than IDB procedures, for example), and the fact that the Bank i s m u c h more advanced in processing the project, the Bank, the IDB and OFID will finance separate procurement packages, using parallel (rather than joint) financing. However, economies o f scale will be realized by having a single management, reporting and evaluation system for the project. Joint supervision missions will reduce the burden o n the implementing agencies, and help ensure that the advice i s consistent. During appraisal, the Government formally requested financing f r o m the IDB and -9-
  17. 17. OFID. The contracts to be financed b y the Bank will be co-financed 25 percent by the Government. B. Institutional and implementationarrangements 37. The project will be implemented by the Unidad de Electrijkacidn Rural y Suburbana (UERS), a unit within CDEEE, and the three EDEs. UERS will coordinate, monitor and report on implementation, and serve as the Bank’s main point o f contact. UERS has so far been responsible mainly for programs to improve service in rural and poor urban areas, so it will need strengthening to undertake this new task. An experienced procurement specialist has been appointed b y UERS and qualified consultants will be recruited by UERS under the project, to assist in supervision and monitoring functions as detailed in Annex 6. Each EDE will be responsible for the design, technical specifications and construction supervision o f the investments in i t s own network. 38. UERS will carry out i t s responsibilities using i t s existing organizational structure, with a strong participation o f technical and procurement staff assigned by the three EDEs. The UERS Director General, who reports directly to CDEEE’s Executive Vice President, will coordinate all project activities between CDEEE and the EDEs and will be the direct liaison with the Bank and other financiers. Administrative, procurement and financial activities will be handled by the Administrative Directorate, using existing monitoring, procurement, financial, budget, and filing systems, which are satisfactory to the Bank. Technical aspects will be handled by the procurement and technical staff o f the EDEs, supported by UERS as required. UERS will be responsible for completing procurement bidding documents packages and managing the overall procurement process, including the preparation o f supply and installation contracts for signature by the EDEs. The EDEs and UERS will jointly be responsible for the evaluation o f proposals and recommendations for award. C. Monitoring and evaluation o f outcomeshesults 39. UERS and the EDEs, with the assistance o f the consultants and auditors, will monitor progress against the agreed performance indicators specified in Annex 3. CDEEE and the EDEs have already implemented systems for providing timely information on the CRI. UERS will provide, on a quarterly basis, 45 days after the end o f each quarter, consolidated reports on project implementation progress in the Bank’s IFR format. I t will prepare a detailed mid-term report to serve as the basis for a project mid-term review, and will also help prepare the Borrower’s contribution to the Implementation Completion Report (ICR). D. Sustainability 40. The Government has recognized for several years the critical importance o f improving the quality o f electricity supply and reducing the fiscal burden o f the sector, and has implemented a series o f reforms towards these ends. However, the long-term sustainability of the project also requires that the EDEs be restored to a sound financial footing, by not only improving the C R I but also controlling operating costs, improving relations with customers, reducing sharply their large debt overhang, and being able to collect tariffs commensurate with their costs. Accordingly, the project will monitor the CRI, the EDEs’ operating costs, the hours - 10-
  18. 18. o f electricity service provided, and consumer satisfaction. In addition, the project includes consultancy on how to handle the existing debt o f the EDEs. Government’s political ability to raise tariffs will be greatly enhanced by improvements in the quality o f service that should result from the project. E. Critical risks and possible controversial aspects Risk Rating Risk Mitigating Measures Rating N o resolution of debt overhang problem o f H Comprehensive plan for addressing debt S the EDEs overhang problem Uncertainties regarding raising power H Government to provide budgetary S tariffs in line with petroleum price hike support to compensate EDEs Shared implementation arrangements S Clear division o f responsibilities defined M between CDEEE and EDEs may prove in Subsidiary Agreements and the unwieldy Operations Manual EDEs lack capacity to implement the M Experience of EDEs i s improving; L project satisfactorily furthermore turnkey contracts will be used The new administration (election in May M Although one cannot fully discount this L 2008) may not support the project. risk, there appears to be a strong political consensus in support o f the sector reforms supported by the project. Difficulties in the implementation o f the M Initial experience has been very positive. L community outreach component TA and support will be provided. Overall Risk M H: High; S: Substantial; M: Moderate; L: Low F. L o a d c r e d i t conditions and covenants 4 1. We do not expect any significant, non-standard conditions for Board presentation. Loan effectiveness will be contingent upon the execution o f the subsidiary agreement between Government and CDEEE, and the agreements between CDEEE and each o f the three EDEs. For the project implementation period, specific target levels for the CRI and for controlling increases in operating costs have been agreed with the EDEs. 42. The EDEs have agreed to achieve the following CRI levels (calculated o n a six-month basis, to smooth out seasonal fluctuations): - 11 -
  19. 19. I I EdeNorte I EdeSur I EdeEste I June 2008 57 62 62 December 2008 59 63 63 June 2009 60 64 64 1 December 2009 I 61 I 65 I 65 I June 20 10 63.5 67.5 67.5 December 20 10 66 70 70 I June 201 1 I 68.5 I 72.5 I 72.5 I December 20 1 1 71 75 75 June 2012 73.5 77.5 77.5 December 20 12 75.0 80.0 80.0 43. The EDEs also agreed to limit the increase in their annual operating costs (excluding taxes, depreciation, fees to CNE, OC and SIE, and allowances for uncollectible bills) to half the percentage o f the increase o f the total energy bills (in GWh) issued, adjusted for inflation. 44. In case any o f the EDEs are unable to achieve these targets, they will, jointly with UERS, submit a plan to the Bank to improve the indicator in the following six months. In case such improvement does not materialize, the Bank would have the right to suspend disbursement. IV. APPRAISAL SUMMARY A. Economic and financial analyses 45. The project will upgrade the circuits that deliver about 35 percent o f the total energy in the interconnected system (excluding PRA). Because the C R I i s expected to increase by 20 percent in the circuits, the project would raise the nationwide CRI by about 7 percent. This would yield about US$125 million per year o f additional gross revenue for the EDEs, and US$100 million per year o f net income after deducting their increased purchase o f energy. 46. Economic analysis. The first economic benefit will be the reduction in technical losses in the circuits being rehabilitated from an average o f around 15 percent o f power supplied to about 7 percent. These losses are valued at the cost o f power purchased by the EDEs (US$l3O/MWh). 47. A second benefit i s the result o f the reduction in electricity theft and wastage -- through both illegal and un-metered connections, and by not paying bills. These are being addressed through (a) greatly expanded metering, (b) tamper-proof meters and other technical measures to make theft more difficult, and (c) improved service quality and the community outreach component, both o f which are expected to make consumers more willing to pay for their electricity. While much o f the resultant benefit to the EDEs will be only a transfer payment (in economic terms) from consumers, there will be a reduction in demand by those users who now - 12-
  20. 20. do not pay for electricity at all or pay only a flat fee. Based o n experience, the EDEs have estimated this reduction in demand to be at least 20 percent o f consumption. Because consumers value this consumption at between zero and the tariff, we have used (the other) half o f the US$200/MWh tariff as the estimated economic saving. 48. A third benefit would result from increased hours o f power availability, as distribution circuits are upgraded from categories D and C (up to 18 h o u d d a y ) to categories B (21 hourdday) or A (24 hour/day availability). The electricity would substitute for far more expensive and inefficient types o f energy (e.g. back-up generators; bottled gas; propane). Based on a sample o f users analyzed by the EDEs, we estimate the economic cost o f the energy replaced as being twice as much as the cost o f power from the grid. 49. The resultant economic rate o f return (ERR) for the project i s 73 percent and the net present value US$428 million. Counting only the reduced technical losses yields an ERR of 17 percent, and adding the second benefit o f electricity not wasted raises this to 25 percent. 50. Financial analysis. The financial rate o f return o f the project i s estimated at 59 percent. This high estimate i s typical o f distribution projects, because o f the short implementation period for individual sub-projects, the high returns in general to network rehabilitation, and the selection o f sub-projects based o n their expected contribution to the C R I improvement. 5 1. Financial models were constructed for both CDEEE and the three EDEs, to assess their projected financial soundness. CDEEE i s expected to become profitable by 2010 because o f the earnings o f its subsidiaries EGEHID and, to a much lesser extent, ETED, which will offset CDEEE’s own losses (US$258 million in 2008, growing to US$287 m i l l i o n by 2013) from administration o f the PPAs. O n the other hand, in order for the EDEs to become profitable, they will have to both substantially increase the C R I and obtain a considerably larger margin between the average tariff they receive and the power-purchase price they pay - through some combination o f tariff increases (mainly to offset fuel price increases over the past year) and reduction o f generation costs (by new investments and/or renegotiation o f the PPAs). In the base case scenario, which include the C R I rising to 78.5 percent by 2013 (largely but not entirely as a result o f the project), tariffs being raised to the indexed level, and generation costs reduced by both conversion o f one plant to natural gas and construction o f new coal-based facilities (but not by renegotiation o f the PPAs, because o f the uncertainties surrounding that), the EDEs would break even b y 201 1 and be profitable thereafter, permitting tariffs to start to come down. If the tariff were to remain frozen at the current level, the EDEs would continue to require at least US$600 milliodyear in financial support throughout the period. B. Technical 52. CDEEE and the EDEs have implemented investment projects o f a similar nature with acceptable standards o f quality. They have well-qualified staff to do the design engineering, planning and implementation o f the investment components under the project. The project will employ modern technological practices in rehabilitating the distribution networks. The Bank team reviewed the feasibility reports for the identified investments, and made field visits, and was satisfied with the technical standards and criteria proposed. - 13 -
  21. 21. C. Fiduciary 53. A procurement capacity assessment carried out by the Bank found that while UERS and EDE staff are competent at procurement in general, they have limited experience o f the Bank’s procurement rules. A full time procurement specialist was hired by CDEEE to strengthen the ability o f UERS to apply the Bank’s procurement guidelines. Bank staff and consultants worked intensively with UERS in the preparation o f the procurement plan, the Operations Manual, and in general training them in Bank procurement. 54. The Bank’s review o f CDEEEKJERS financial management arrangements found them to be generally satisfactory. The annual audited project and entity financial statements will be provided to the Bank within four months o f the end o f each fiscal year, and project financial statements will be provided also at the closing o f the project. Financial statements for CDEEE and the EDEs will be audited by an auditor acceptable to the Bank, in accordance with International Standards on Auditing. D. Social 55. Experiences in various countries have demonstrated that poor populations are those most affected by the lack o f electricity; the same holds true in the Dominican Republic. Extrapolating the results o f a 2004 survey’*, the Dominican people spent US$37 milliodmonth on alternative energy sources (candles, kerosene, o i l lamps, emergency generators, etc.) to compensate for the unreliability o f the electricity service. For the poorest people, the cost amounted to 6-10 percent o f their income. Furthermore, small businesses have been forced to close, provision o f social services such as education and health was disrupted, and the lack o f public lighting increased the risk o f crime. Other studies have shown that the social and economic benefits o f reliable electricity for the urban poor are numerous. Some o f the main benefits identified in the Bahia Workshop13 on “Meeting the Energy Needs o f the Urban Poor: the Case o f Electrification” were (a) increased local income-generating activities, (b) less indoor air pollution, (c) lower risk o f fires, (d) reduced violence against women and greater security from street lighting, and (e) better educational performance by children who can read and study for longer periods o f time; 56. Based on this international experience, as well as the results o f the “24 Hours o f Light Program” the project seeks to address both the lack o f reliable quality service and the l o w level o f cash collections, through improvements in the distribution network and through the community outreach component. This latter component would bring the EDEs and residential consumers together, so that the companies can better learn their customers’ needs and complaints, and the consumers can better appreciate the constraints facing the companies, including how theft o f power ultimately harms consumers in general. I* NRECA International Ltda. “Analysis o f Tariffs and Subsidies in the Electrical Sector o f the Dominican Republic”, 2004 l3 The Bahia workshop was designed and financed by the Energy Sector Management Assistance Program (ESMAP)/World Bank, the United States Agency for International Development (USAID), Cities Alliance, Electricite de France (Edf’), the Inter-American Development Bank (IADB) and COELBA, the Electricity Company o f Bahia. The workshop was held in Bahia, Brazil in September 2005. Case studies form India, Colombia, Brazil, Venezuela, Morocco, South Africa, Argentina, Philippines and Georgia were presented and analyzed. Rojas, Juan Manuel and Lallement, Dominique. “Meeting the energy needs o f the urban poor: the case o f electrification.” ESMAP Technical Paper 118/07. - 14-
  22. 22. E. Environment 57. The environmental benefits from removing a large number o f the illegal wires on city streets, which are unsightly and lead to accidents, and from reducing the use o f kerosene and other household alternatives to reliable electricity supply, outweigh the potential negative environmental impacts identified. The Project i s classified as an Environment Category B, because o f i t s limited environmental impact. 5 8. The environmental guidelines for electric energy distribution works prepared for the project were developed following an open, inclusive participation process. All stakeholders were invited to participate in the guidelines discussion process. Once the first draft was finalized (with the consensus o f the EDEs), i t was sent to the Secretary o f State for Environment and Natural Resources (SEMARN) for further review and made public through the internet website o f the EDEs. SEMARN has reviewed the draft document and requested minor adjustments that are being incorporated. SEMARN has convened an open meeting (open to the public in general, as required by law) with the participation o f the three EDEs, as part o f the process required for the final enactment o f the guidelines as an official regulation. Once enacted, the guidelines will become mandatory. In addition, the Boards o f Directors o f the EDEs will also enact the guidelines for further compliance assurance. The process followed to enact environmental regulations through direct involvement o f the stakeholders i s a first in the DR and an example that might be followed for future regulations. F. 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 4.1 1) [I [ XI Involuntary Resettlement (OP/BP 4.12) [I [ XI Indigenous Peoples (OP/BP 4.10) [I [ XI Forests (OP/BP 4.36) [I [ XI Safety o f Dams (OP/BP 4.37) [I [ XI Projects in DisputedAreas (OP/BP 7.60)* [I [ XI Projects on International Waterways (OP/BP 7.50) [I [ XI G. Policy Exceptions and Readiness 59. N o policy exceptions are sought for the project. - 15 -
  23. 23. Annex 1: Sector Background DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project The Electricity Sector 1. For decades, the electricity sector has provided substandard service, with inadequate generation capacity (until recently) and frequent power cuts. Reducing the high level o f financial losses in the distribution system and improving the poor quality o f power supply are the main issues that need to be addressed to resolve the electricity crisis. These t w o issues are locked in a vicious circle, as poor quality o f service, permanent customer dissatisfaction, and high t a r i f f ~ have induced theft through illegal connections and n o n p a y m e n t o f electricity bills ’~ by businesses and households, at times with the connivance o f staff o f the distribution companies. The problem has been compounded by the inability to cut o f f supplies for overdue bills together with the impunity with which consumers reconnect to the grid illegally. The result i s k n o w n somewhat facetiously as “ l a cultura de no pugo” (“the culture o f not paying”). 2. The Annex focuses o n three important aspects o f the sector. The first i s the history o f the reforms, and the difficulties that have been encountered, t o help understand h o w the country arrived at the present situation. The second i s tariffs, which, along with improving cash recovery, i s key to the financial sustainability of the sector. And the third i s the social aspects - or h o w to change “ l a cultura de nopago. ” History of the Reforms 3. In the mid- 1990s, the Government addressed the generation shortages by encouraging independent power producers (IPPs), which entered into Power Purchase Agreements (PPAs) to supply Corporacidn Dominicana de Electricidad (CDE), the vertically integrated power utility. The new capacity significantly reduced power shortages; however, as elsewhere, this approach led to high electricity prices. Deals were worked out through negotiations (only one was tendered competitively), which raised issues o f transparency and corruption. Furthermore, the PPAs soon became inconsistent with the revised sector structure, and had t o be renegotiated. 4. Sector reform accelerated in 1997, with the Public Sector Enterprise Reform Law. CDE was unbundled into t w o generation companies (Itabo and Haina) and three electricity distribution enterprises (EDEs), EdeNorte, EdeSur and EdeEste, covering the north, south and east o f the country, respectively. These companies were successfully privatized in 1999 through the sale o f 50 percent shareholding with management control, for a combined price o f US$644 million, divided almost equally between generation and distribution. The remaining shares were transferred to the Fondo Patrimonial de Las Empresas (FONPER), t o be managed as an investment rather than a sector policy instrument. 5. The Electricity L a w o f July 2001, and supporting regulations one year later, created the legal and regulatory framework along with n e w institutions t o formulate energy policy and l 4 Average tariff i s US$0.20/kWh, with average residential rate at US$O.l6/kWh, industrial rate at US$0.23/kWh, and commercial at US$0.29/kWh. - 16-
  24. 24. regulate the sector. The National Energy Commission (Comisidn Nacional de Energia, CNE), composed o f the Secretary o f Industry and Commerce, Secretary o f Finance, Technical Secretary o f the Presidency, Director o f the Central Bank, and Secretary o f Agriculture, i s in charge o f energy policy. The sector regulator i s the Office o f the Superintendent o f Electricity (Superintendencia de Electricidad, SIE), headed by a council o f three members (one o f whom i s the Superintendent) appointed by the President and ratified by Congress. There i s also a Consumer Protection Office (Oficina de Proteccibn a1 Consumidor de Energia Ele’ctrica, PROTECOM) established under SIE. A Coordinating Body (Organismo Coordinador, OC), i s responsible for load dispatch; i t s 5 directors are the Superintendent and representatives o f the state hydro generator EGEHID, private generators, the state distribution company ETED and the EDEs, so that it reflects the interests o f all parts o f the sector. 6. Crisis of 2002. Soon after the sector restructuring, the international increase in fuel prices o f 2000-01 affected the country. Retail tariffs required a substantial increase, as fuel cost represents almost 50 percent o f the total electricity cost. Instead, the Government froze them, and took on the responsibility o f compensating tariffs for all customers for the fuel price increase, general inflation and exchange rate components, through a “generalized subsidy.” The relentless increase in fuel prices obliged the Government to inject up to US$20 milliodmonth into the sector, which quickly became unsustainable. 7. The PPAs also imposed a financial drain on the sector. In 2001 they were renegotiated (the “Madrid Agreement”), and the Government significantly reduced i t s role as a single buyer. However, the trade o f f included the extension o f validity o f the PPAs for several years, which limited the extent o f competition in the generation market. Some IPPs were to be compensated for the ensuing “stranded costs” resulting from negotiated prices below the original PPAs. But the Government lacked the funds for this, and its accumulated debt with the IPPs reached US$179 million by September 2002. Although the privatized EDEs were able to improve the CRI, the increase in fuel prices eroded their income (despite Government subsidies), which led them to cut power in predominantly poor neighborhoods where losses were more acute, and suspend payments to energy suppliers. Non-payment by both the Government and the EDEs led the IPPs to suspend production. 8. The result was the worst crisis ever to affect the power sector. From mid-2002, power cuts curtailed supplies by over 20 hourdday in vast areas, particularly the poor neighborhoods. B y September 13, 2002, over 50 percent o f all circuits in EdeSur were out o f service. The resulting riots claimed 15 lives. 9. September 2002 Reforms. O n September 17, 2002, the Government announced urgent measures to deal with the crisis and seek a longer-term solution. The measures included (a) payment o f i t s arrears to the IPPs, (b) elimination o f the “generalized subsidy,” while maintaining subsidies for the urban poor, (c) payment o f i t s electricity bills, and (d) an effort to fight electricity theft, through establishment o f the Anti-Fraud Program (PAEF). But these measures provided only a brief respite, and the sector once more plunged into disarray in 2003. 10. The Crisis of 2003-04. When fuel prices rose again in March 2003 due to the Iraq war, the Government did not adjust the tariff for residential customers’ first blocks (up to 700 kWWmonth), and created a Stabilization Fund to cover the difference. Later, it introduced - 17-
  25. 25. cross subsidies from other tariff categories, so as to limit the growth o f the Stabilization Fund; this, however, rendered price setting increasingly ad hoc. The EDEs also lost out financially due to payment lags and depreciation (the Stabilization Fund was denominated in RD$). The macroeconomic crisis exacerbated the problem o f non-payment o f bills. “Financial blackouts” reappeared, as generators declared themselves unable to finance fuel purchases because EDEs were lagging in their payments. Growing antagonism towards the EDEs, due the extensive rationing o f service, made the position o f Unidn Fenosa in EdeSur and EdeNorte difficult. Under growing political pressure, instead o f working with Unidn Fenosa to resolve the issues, the Government repurchased the shares in these two companies in September 2003, and returned their operation to CDEEE. In November 2004, AES sold i t s shares in EdeEste to TCW, while remaining as the operator. 11. In October 2003, an International Panel o f Experts, jointly financed by the Bank, IMF and IDB, reviewed the sector issues in the context o f this nationalization. I t s recommendations included (a) tariff increases to US$lS/MWh, (b) better targeting o f subsidies to the poor, (c) normalizing payments from EDEs to generators, (d) institutional reforms, and (e) in dues course, incorporating new private participation in EdeSur and EdeNorte. It called for negotiation o f a “national pact” among the political parties, consumers and the private sector, as a means o f addressing the cultura de no pago and making reforms politically feasible and sustainable. These recommendations had little impact, and instead, there was further deterioration, as the Government, in the period around the M a y 2004 elections, failed to address the sector issues. However, with the ending o f the macroeconomic crisis and the subsequent appreciation o f the RD$, plus the resumption o f tariff increases, the situation began to improve, and there were further improvements after the M a y 2006 legislative elections put the same party in control o f both the Presidency and the legislature. Tariffs 12. In addition to the CRI, the other critical issue for the financial viability o f the sector i s tariffs. Average prices for electricity in the Dominican Republic are among the highest in Latin America, due to the a) reliance on imported o i l for electricity generation, b) high prices originally negotiated in the PPAs, c) limited amount o f competition, in this small, island economy, d) high commercial risks facing operators, especially given the repeated sector financial crises, and e) l o w CRI, which requires higher tariffs on those who pay to help offset the losses due to theft o f electricity. 13. Retail prices are based o n voltage delivery levels, including a multi-block residential tariff based on the consumption level. There i s a formula for the automatic adjustment o f retail tariffs for variations in o i l prices, inflation and the exchange rate. At critical times, however, the Government has been unwilling to let the EDEs raise consumer tariffs rapidly in accordance with the formula, and has instead agreed to make up the difference from a Stabilization Fund. This happened during the economic crisis o f 2003-04, and i s occurring again n o w because o f the dramatic increase in international o i l prices. The applied tariff was generally in line with the indexed tariff from late-2004 until M a y 2007, but a gap o f about 15 percent has opened since. This added about U S $ l O million per month to the fiscal gap during August - November, 2007 (see graph below), and will be somewhat more (assuming that o i l prices remain at current levels) -18-
  26. 26. during the coming months because o f lags in the system (electricity bills reflect fuel imported a few months earlier). Average Indexed and Applied Electricity Retail Tariffs (2005-2007) 0.25 7 . .. . . - . .. . . ._._- __I__. ..” . . ... . . ... . .. .. . .. . - . . - .. 015 005 1 - __ /+Indexed tariffs +Applied tariffs I Social Aspects 14. Community outreach i s essential for changing “la cultura de no pago. ” For the implementation o f community outreach activities, the EDEs have created Social Units at the management level, comprised o f social experts, and with the involvement o f NGOs and Universities. The Social Units have developed community participatory methodologies to engage civil society in the solution o f the energy crises. Through these activities, the EDEs design and implement Social Action Plans which include campaigns o f information and communication about the electricity services, educational activities and signing o f Social Agreements (Pactos Sociales) with communities. These Social Agreements have already been very successful in the areas where the Program has been developed. For instance, EdeNorte implemented the “24 Hours o f Light Program” in 26 circuits o f 11 Provinces during the first half o f 2007. In these circuits, the number o f legal clients increased from 45,101 to 161,350 (358 per cent). In one o f the circuits rehabilitated, the commercial losses decreased from 5 5 percent to 11 percent, and the collection losses decreased from 61 per cent to 23 percent. EdeEste has also signed 49 Social Agreements since 2006. 15. The “24 Hours o f Light Program” has also had positive impact on the consumers due to several reasons. First, the cost for alternative sources o f energy has been reduced for consumers; the cost o f ice to refrigerate food; and saving the expense o f replacing food spoiled because o f the lack o f electricity. These monthly costs have been reduced between 15 to 56 percent per - 19-
  27. 27. month as it was showed in some cases studied by EdeEste. Some o f the most benefited have been the owners o f small businesses and industries. In all the sectors where the Program has been implemented, the satisfaction o f consumers has also increased f r o m 60 percent to 80 percent. EdeEste conducted a survey in a representative sample o f female headed households after one year o f the implementation o f the Program. Some 98 percent assessed the Program as good or excellent, 97 percent perceived that security had increased in the neighborhood, 71 percent were sharing more time with the family at night, watching television o r listening to the radio, 86 percent responded that their husband was spending more time at home, 93 percent stated that they feel better because o f the availability o f energy, 30 percent stated that their income has improved, 67 percent affirmed that their relationship with their husband has improved, and 100 percent reported a positive image o f EdeEste. 16. Several experiences in different countries have demonstrated that poor populations are those most affected because o f the lack o f electricity. The consequences o f a lack o f reliable electricity service for the poor populations in Dominican Republic are not different. A study conducted in 200415 demonstrated the impact o f the energy crisis o n the Dominican population. The extrapolation o f the results o f a survey applied to a representative sample o f the Santo Domingo population showed that people spent US$3 7 m i l l i o d m o n t h in alternative energy sources (Le. candles, kerosene, o i l lamps, emergency plants, etc.) given the lack o f reliability o f the electricity service. Since the poor populations do not have resources t o access reliable sources o f alternative energy (such as self generators), they are the most affected. Six to ten percent o f the monthly income o f the poorest i s spent o n alternative sources o f energy, small businesses are forced t o close, provision o f social services such as education and health are disrupted, and the lack o f public lighting has increased the risk o f crime. 17. Additionally, studies about the impact o f provision o f reliable electricity for poor populations have shown that the social and economic benefits o f electrification for the urban poor are numerous. Some o f the m a i n benefits identified in the Bahia Workshop16 o n “Meeting the energy needs o f the urban poor: the case o f electrification” were the following: 0 Improved household disposable income f r o m paying less for the utility service compared to the services provided through illegal distribution, and increased income opportunities generated by the reliability o f service; Increased local income-generating activities when power and lighting i s available; Health benefits: reduce risk o f indoor air pollution and lower incidence o f related diseases; 0 Improved household safety, particularly f r o m lower risk o f fires; ’’ NRECA International Ltda. “Analysis o f Tariffs and Subsidies in the Electrical Sector o f the Dominican Republic”, 2004 16 The Bahia workshop was designed and financed by the Energy Sector Management Assistance Program (ESMAP)/World Bank, the United States Agency for International Development (USAID), Cities Alliance, Electricite de France (Edf), the Inter-American Development Bank (IADB) and COELBA, the Electricity Company o f Bahia. The workshop was held in Bahia, Brazil in September 2005. Case studies form India, Colombia, Brazil, Venezuela, Morocco, South Africa, Argentina, Philippines and Georgia were presented and analyzed. Rojas, Juan Manuel and Lallement, Dominique. “Meeting the energy needs o f the urban poor: the case of electrification.” ESMAP Technical Paper 118/07. - 20 -
  28. 28. Reduced violence on women; Increase in educational levels o f the household, particularly for children who can read and study for longer periods o f time; Boost in social status, from social exclusion to social inclusion; More efficient use o f electricity when programs include adequate training components; Security from street lighting; More investments in housing improvements; and Inclusion and reinsertion into society o f formerly illegal consumers and illegal electricity suppliers (former illegal electricity suppliers are helped to create real businesses as electricians once consumers are legalized). 18. Another important conclusion o f the case studies analyzed in the Bahia workshop was the pivotal role o f community participation for the success o f electrification programs. Partnership with local communities also includes close cooperation with community-based organizations to better understand the technical, financial and socioeconomic conditions o f the neighborhoods involved in the electrification programs. These organizations play a key role to mobilize the community to understand their rights and obligations. Partnering with communities has been demonstrated to be the best bridge among users, distribution companies and governments, and the best way to build understanding and trust with consumers. Additionally, community-based mechanisms have been useful against infrastructure vandalism and electricity pilferage. The design and implementation o f the community participation programs have required the electric companies to hire social scientists and create social teams, which have demonstrated to be the most effective approach for distribution companies in the implementation o f electrification programs. As the report o f the Bahia Workshop said, this i s the “need for engineering with sociology.” -21 -
  29. 29. Annex 2: Major Related Projects Financed by the Bank and/or other Agencies DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project 1. The Bank’s portfolio in the energy sector includes a U S $ l 5 0 million Programmatic Power Sector Reform Loan (PPSRL) approved in May 2005 and declared effective in December 2006, and an ongoing US$7.3 million Energy Sector Technical Assistance Loan (ESTAL) which was signed in March 2004 and became effective in August 2005. (The main reason for the delays in effectiveness was the time taken to obtain the necessary ratification by the Dominican legislature.) The PPSRL supports the initial phase o f the financial recovery o f the power sector to stabilize power supply, b y improving cash recovery, controlling costs and dealing with arrears. The loan i s designed to be disbursed into three tranches. The first and second tranches have been disbursed The conditions for disbursement o f the third tranche include (a) the C R I for the three EDEs combined averaging above 60 percent for a six-month period, (b) resumed application o f the tariff adjustment formula, especially incorporating the price o f fuel, and (c) selection and public announcement o f the option for private participation in the state-owned EDEs. The current closing date i s June 30, 2008; any extension will require a formal request from the Secretaria de Hacienda. 2. The ESTAL i s assisting the Government to achieve the following objectives: (a) reinforce i t s transmission network and restore the financial sustainability o f the power sector; (b) strengthen i t s power sector institutions in charge o f consumer protection, policy making and portfolio management; (c) increase the supply o f affordable energy to the poor; and (d) reduce potential negative environmental impacts. Assistance i s being provided to the various institutions in the sector such as SIE, CNE, OC, PAEF, UERS, PRA, ETED, EGEHID, and SEMARN. Implementation o f the project i s now proceeding satisfactorily, after the initial delays. 3. The Bank’s pipeline in the energy sector, in addition to the proposed Electricity Distribution Rehabilitation Project, includes a future Development Policy Loan that would continue providing budgetary support to the Government linking disbursement to progress on power sector reforms. 4. Other donors which are supporting the Government in the energy sector include USAID, mainly via technical assistance and several rural electrification projects in collaboration with the National Rural Electric Cooperative Association (NRECA). The European Union i s providing assistance through i t s Energy Facility to UNDP for small projects in rural electrification with renewables and to EdeEste for a pilot project on community participation in the PRA area. The IDB i s providing technical assistance for the development o f bio-fuels. - 22 -
  30. 30. Annex 3: Results Framework and Monitoring DOMINICAN REPUBLIC: Electricity Distribution Rehabilitation Project 1. The financial success o f the project will be measured by the increase in the Cash Recovery Index, which depends upon both the amount o f electricity loss reduction in each o f the circuits, and the increase in the rate at which electricity bills are collected. Improving the availability o f power around-the-clock i s both an end in itself and a means o f inducing consumers to pay. While the project itself will upgrade only selected circuits, it i s important that these improvements not be offset by deterioration elsewhere; therefore, the Project Development Objectives are nationwide, while the Intermediate Outcomes refer to the circuits with project investments. An improved financial situation will allow the EDEs t o finance further investments that improve the quality o f electricity service. Project Development Project Outcome Indicators Use of Project Outcome Objectives Information a) Increase the Cash Recovery a) Increase the CRI in each EDE as Government, UERS and EDEs, will Index CRI” o f the three a whole. monitor and assess progress o f distribution companies (EDEs) b) ASAI: Average Service performance indicators. For EdeNorte b) Improve the quality o f Availability Index (Indice de and EdeSur, this could result in electricity service Disponibilidad Promedio del specific steps to strengthen their Servicio), per circuits with project management. investments and in each EDE as a whole. Review commercial practice and c) Increase percentage of people customer services. satisfied with electricity service by distribution companies. Intermediate Outcomes Intermediate Outcome Use of Intermediate Outcome Indicators Monitoring a) Rehabilitationo f selected a) Number o f Social Agreements Identify changes needed in project circuits signed andor completion o f management, design, or physical works in each selected implementationo f all three project b) CRIs o f rehabilitated circuits circuit components b) Increased CRIs by circuit c) Increased power availability by intervened circuit c) Increase average availability index ASAI 18: d) Controlling operating costs o f d) Increase percentage of people the EDEs satisfied with electricity service in the circuit intervened. e) Operating costs increase less than the rate o f supply expansion and inflation 17 The CRI formula is: (energy billed by distribution companies / energy purchased by distribution companies) multiplied by (electricity billings paid by consumers / total electricity billings issued to consumers). I8 The Average Service Availability Index (ASAI) i s the ratio o f the total number o f customer hours that service was available during a given time period to the total customer hours demanded. This i s sometimes called the service reliability index. The ASAI i s usually calculated on either a monthly basis (730 hours) or a yearly basis (8,760 hours) but can be calculated for any time period. - 23 -
  31. 31. 2. The UERS (a part o f CDEEE) and key staff from the EDEs, with the assistance of project-financed consultants, will monitor progress against the agreed performance indicators. CDEEE and the EDEs have already implemented systems for providing timely information on losses, collections and C R I calculations. UERS will provide, 45 days after the end o f each quarter, consolidated reports on project implementation progress in the Bank’s FMR format. I t will prepare a detailed mid-term report to serve as the basis for a project mid-term review, and will also help prepare the Borrower’s contribution to an Implementation Completion Report (ICR). - 24 -
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