Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: June 2013 Proposed Grant and Administration of Grant Kingdom of Tonga: Outer Island Renewable Energy Project

2 CURRENCY EQUIVALENTS (as of 23 May 2013) Currency unit pa anga (T$) T$1.00 = $0.56 $1.00 = T$1.77 ABBREVIATIONS ADB Asian Development Bank ECO electricity cooperative societies EIRR economic internal rate of return EPU energy planning unit FIRR financial internal rate of return LCOE levelized cost of electricity MFNP Ministry of Finance and National Planning MLECCNR Ministry of Lands, Environment, Climate Change, and Natural Resources O&M operation and maintenance PMC project management consultant SHS solar home system TERM Tonga Energy Road Map TERM-IU Tonga Energy Road Map Implementation Unit TPL Tonga Power Limited WEIGHTS AND MEASURES kwh kilowatt-hour kwp kilowatt-peak MW megawatt MWp megawatt-peak NOTE In this report, "$" refers to US dollars, unless otherwise stated.

3 Vice-President S. Groff, Operations 2 Director General X. Yao, Pacific Department (PARD) Director R. Guild, Transport, Energy and Natural Resources Division, PARD Team leader Team members Peer reviewer P. Hattle, Energy Specialist, PARD S. Lee, Principal Social Development Specialist (Gender and Development), PARD T. Leono, Project Analyst, PARD M. Melei, Country Specialist, PARD N. Sapkota, Safeguards Specialist, PARD A. Syed, Counsel, Office of the General Counsel J. Williams, Senior Environment Specialist, PARD A. Lopez, Energy Specialist (Solar), Regional and Sustainable Development Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 PROJECT AT A GLANCE CONTENTS I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 4 E. Implementation Arrangements 4 III. DUE DILIGENCE 6 A. Technical 6 B. Economic and Financial 6 C. Governance 7 D. Poverty and Social 8 E. Safeguards 9 F. Risks and Mitigating Measures 9 IV. ASSURANCES AND CONDITIONS 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework List of Linked Documents 14 Page

5 PROJECT AT A GLANCE 1. Project Name: Outer Island Renewable Energy Project 2. Project Number: Country: Kingdom of Tonga 4. Department/Division: Pacific Department/Transport, Energy and Natural Resources Division 5. Sector Classification: Sectors Primary Subsectors Energy Renewable Energy 6. Thematic Classification: Themes Primary Subthemes Economic growth Promoting macroeconomic stability Environmental sustainability Natural resources conservation 6a. Climate Change Impact Adaptation Medium 6b. Gender Mainstreaming Gender equity theme (GEN) Mitigation High Effective gender mainstreaming (EGM) Some gender elements (SGE) No gender elements (NGE) 7. Targeting Classification: 8. Location Impact: Targeted Intervention National High General Intervention Urban Low Geographic dimensions of inclusive growth 9. Project Risk Categorization: Low Risk Millennium development goals Income poverty at household level 10. Safeguards Categorization: 11. ADB Financing: 12. Cofinancing: Environment Involuntary resettlement Indigenous peoples Sovereign Modality Source Amount ($ Million equivalent) Sovereign Project grant Asian Development Fund 2.0 Total 2.0 Financier The Government of Australia, through the Australian Agency for International Development (AusAID) B C C Category Amount ($ Million equivalent) Administration Type Official-Grant 4.50 Full Total Counterpart Financing: Source Amount ($ Million) Government 0.3 Total Aid Effectiveness: Parallel project implementation unit Yes Program-based approach No

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7 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed grant and (ii) proposed administration of a grant to be provided by the Government of Australia 1 to the Kingdom of Tonga for the Outer Island Renewable Energy Project. 2. The proposed project will construct and install solar power systems with an overall distributed capacity of 1.25 megawatt-peak (MWp) on nine outer islands in Tonga. This capacity will be provided as follows: (i) a total of 0.8 MWp on Eua, Vava u, and Ha apai; (ii) a total of 0.28 MWp on the four Ha apai outer islands of 'Uiha, Nomuka, Ha'ano, and Ha'afeva; (iii) 0.15 MWp on Niuatoputapu; and (iv) 0.02 MWp on Niuafo ou. In addition to construction and installation of the solar power systems, the project will hire project management consultants (PMCs) to draft the final designs of equipment, support the bidding process, conduct training on the operation and maintenance (O&M) of solar equipment, and provide efficient project implementation and management services for at least 5 years after the plants are commissioned. 2 II. THE PROJECT A. Rationale 3. Tonga is a kingdom of 176 islands divided into five island groups Tongatapu, 'Eua, Ha'apai, Vava'u, and Niuas. Its 102,000 people inhabit the permanent settlements that exist on about 36 of these islands, and 75% live on Tongatapu, the main island and location of the capital, Nuku alofa. About 89% of all households have access to electricity out of them 97% in urban areas and 86% in the rural parts of the islands. 4. Tonga had a total installed grid connected power capacity in 2012 of about 14.3 megawatts (MW). Annual demand was about 52.4 gigawatt-hours. The country depends on imported diesel to produce 92% of its electricity needs and consumed an estimated 15 million liters for power generation in This represented about 10% of total gross domestic product and about 15% of total imports. About 98% of the total electricity supplied in Tonga during that year was grid-connected and generated from diesel. The solar power capacity to be provided by the project will save about 0.48 million liters of diesel per year. 5. The responsibility for provision of grid connected electricity services rests solely with Tonga Power Limited (TPL). TPL is a government-owned, vertically integrated public enterprise under the oversight of the Ministry of Public Enterprises and the cabinet. TPL has the concession for and operates four independent grids for on-grid electricity services. These are on the main island of Tongatapu, and main islands of the Vava u, Ha apai, and Eua island groups, where it generates, distributes, and retails electricity, and provides O&M services. 6. The energy planning unit (EPU) of the Ministry of Lands, Environment, Climate Change, and Natural Resources (MLECCNR) is the primary institutional body responsible for off-grid services. The EPU acts under the policy and planning guidance provided by the Ministry of Finance and National Planning (MFNP) and the Prime Minister s Office. In addition, the Ha apai and Vava u outer island groups have their own management structures for off-grid electricity 1 Through the Australian Agency for International Development. 2 The Asian Development Bank (ADB) provided project preparatory technical assistance. ADB Technical Assistance to Tonga for Preparing the Outer Island Renewable Energy Development Project. Manila (TA TON, $500,000 approved on 2 December 2011, financed by the Japan Fund for Poverty Reduction).

8 2 projects. On the four outer islands of the Ha apai group (Nomuka, Uhia, Ha ano, and Ha afeva), electricity cooperative societies (ECOs) provide day-to-day operations, maintenance, and administration of diesel minigrids. On Niuafo ou, a management committee distributes solar home systems (SHSs). On Niuatoputapu, some households have privately owned SHSs and small diesel generator sets to provide them with electricity. 7. The government has been trying to reduce the high cost of electricity and Tonga s extreme economic vulnerability to oil price increases, a great part of which is due to the electricity sector s high dependence on imported diesel. Power tariffs are inherently high in Tonga because of the high costs of transporting imported diesel to the remote Pacific nation and between its scattered islands. In 2008, the government approved the Renewable Energy Act, a regulatory instrument to promote the use of renewable energy technologies. Under its 2009 National Strategic Planning Framework, it also created the Tonga Energy Road Map (TERM) for the general development, reform, and improvement for the energy sector. TERM aims to generate 50% of Tonga s grid-based electricity from renewable energy resources and to reduce the country s diesel consumption by 50% by By following the recommendations of the TERM report, Tonga may be able to meet its target of reducing diesel consumption by through the latest on- and off-grid renewable energy project developments and by consumer demand-side management measures such as conserving energy, using electricity more efficiently, and reducing the power losses of TPL s electricity distribution network. TPL aims to reduce the electricity tariffs by 25% in The electricity tariff in TPL s concessional area on the islands of Vava u, Eua, and Ha apai was $0.52 per kilowatt hour (kwh) as of August The tariff has two parts: a base variable energy rate, or nonfuel component, of $0.26; and a variable fuel surcharge component of $0.26. Under the concession contract, TPL can pass fuel costs on to consumers and charge an inflation-indexed nonfuel tariff. The nonfuel tariff covers operational costs, overhead expenses, interest payments, depreciation, and an allowed return on investment that provides retained earnings for future capital expenditures and shareholder dividend payments. 10. On the outer islands of Ha apai, the average monthly fee for electricity is about $0.53 per kwh. Niuatoputapu has no power grid and electricity is generated independently by households. On Niuafo ou, an electricity management committee is responsible for the O&M and replacement of parts of about 167 SHSs. On the Niua group the monthly average fuel component for kerosene lanterns, candles, batteries, and electricity for lighting purposes, including the monthly cost for an SHS, has been conservatively calculated at about $0.74 per kwh. This estimate excludes administration, asset management, and O&M expenses. If the nonfuel component was included, the estimated off-grid supply would easily exceed $1 per kwh. 11. The project will support the government s efforts to reduce Tonga s heavy reliance on imported fossil fuels for power generation by providing secure, sustainable, clean electricity. By optimizing TPL and EPU systems, the project can exert downward pressure on tariffs for private and commercial consumers. This will be achieved by connecting a total of 1.25 MWp of distributed solar photovoltaic generator capacity to existing distribution networks and providing PMCs to guarantee project sustainability over a period of five years by transferring knowledge to beneficiaries and the government s implementing unit (as described in paragraph 19 below), 3 Government of Tonga Tonga Energy Road Map, Nuku alofa. Government of Tonga Renewable Energy Act. Nuku alofa.

9 3 and securing O&M. For the rest of the project life cycle, TPL and the private sector (TERM phase 2) are expected to provide management and O&M. 12. The project due diligence has examined and recommended solar energy as the best option with less environmental impact and least cost approach for integrating the required renewable energy facilities into the grid system. It has also demonstrated that lower tariffs (in the case of TPL area of consession) and fees for electricty services (in case of the community based operation areas of EPU) are possible to achieve without any additional subsidy. While improving demand and supply side efficiency, the project will contribute to alleviating poverty, supplying sustainable and reliable electricity, and reducing diesel consumption. 13. The project is in line with ADB s country operations business plan, for Tonga, which makes energy a priority area of support and sets a primary goal of reducing the country s dependence on imported fossil fuels by implementing energy efficiency and conservation measures, including power generation from indigenous renewable energy sources. 4 B. Impact and Outcome 14. The impact of the project will be the reduction of Tonga s dependence on imported fossil fuel for power generation. The outcome of the project will be that on-grid and off-grid generation systems are optimized and provide increased consumer access to electricity generated by solar power at a reduced cost. C. Outputs 15. The outputs of the project are as follows: (i) Solar power. The project will construct and install solar power systems with a total capacity of 1.25 MWp on 9 outer islands of Tonga by (a) connecting solar photovoltaic generators to existing electricity distribution networks (0.2 MWp on Eua, 0.4 MWp on Vava u, and 0.2 MWp on Ha apai); (b) connecting solar photovoltaic generators to existing community-owned and community-managed electrical minigrids on four Ha apai outer islands (70 kilowatt-peak (kwp) on 'Uiha, 70 kwp on Nomuka, 70 kwp on Ha'ano, and 70 kwp on Ha'afeva); (c) connecting 0.15 MWp of solar power capacity to a newly installed distribution system in Niuatoputapu; and (d) expanding existing solar home system capacity in Niuafo ou by installing an additional 100 units of 200 watt peak SHSs. (ii) Operation and maintenance knowledge transfer training. Capacity building of TPL, TERM-IU, ECOS, EMS and EPU through the provision of the project management services by the PMC for at least 5 years following completion of the Project training and transfer of knowledge on asset management and operations and maintenance of solar generation and distribution systems; and preparation of an operations and maintenance program manual for the Project and provision of operations and maintenance services for Project facilities. (iii) Efficient and effective project implementation and management. Capacity building of TPL, TERM-IU, ECOS, EMS, and EPU through the provision of project management services by the PMC for at least 5 years following completion of the Project. 4 ADB Country Operations Business Plan: Kingdom of Tonga, Manila.

10 4 D. Investment and Financing Plans 16. The project is estimated to cost $6.80 million (Table 1). Table 1: Project Investment Plan ($ million) Item Amount A. Base Cost a 1. Works and services (solar power capacity for 9 outer islands and PMC) Administrative costs, including upfront land lease costs b 0.30 B. Contingencies c 0.33 Total (A+B) 6.80 a January 2013 prices. b Comprises office space and materials, counterpart time, telecommunications, and logistics. c Calculated considering price contingency of 5% of base cost (excluding administrative expenses and international inflation), 5% of physical contingency, and a local inflation rate of 6.1% for local components. Source: Asian Development Bank estimates. 17. The government has requested grants totaling $6.50 million to finance project goods, works, and services. 5 The grants comprise a $2 million grant from ADB s Special Funds resources 6 and a $4.5 million grant from the Government of Australia, administered by ADB to help finance the project. The government will provide the equivalent of $0.3 million as in-kind contribution toward land-related and administrative costs. The government will make the proceeds of the grants available to TPL under a subsidiary grant agreement upon terms and conditions satisfactory to ADB. The financing plan is in Table 2. Table 2: Financing Plan Source Amount ($ million) Share of Total (%) Asian Development Bank Special funds resources (grant) Government of Australia (grant) a Government b Total a The Government of Australia, through the Australian Agency for International Development, administered by the Asian Development Bank. This amount includes a provision of 5% of ADB's administration fee, audit costs, bank charges, and a provision for foreign exchange fluctuations (if any), to the extent that these items are not covered by the interest and investment income earned on this grant, or any additional grant from the Government of Australia. b Government in-kind contribution will be in administration costs, such as those for office space and materials, counterpart time, telecommunications, and logistics; and exemption from income taxes (other than for citizens or nationals of the recipient country) on salaries, consulting fees, and benefits. In addition, the 1% fee based on the capital cost of the project, and defined under the Environmental Impact Assessment Regulation 2010 will be waived as well. Source: Asian Development Bank estimates. E. Implementation Arrangements 18. The government will be the grant beneficiary. The executing agency will be the MFNP. 5 Finance will include all goods, works, associated services for erecting, commissioning, start-up and trial period of the solar photovoltaic equipment of the project; and for the project management consultants and all sea, air, and land transportation (national and international), including cost insurance and freight to project site and warehouse. 6 A country's eligibility for ADF grants under the revised grant framework is determined by its risk of debt distress. The latest debt sustainability analysis determined that Tonga had a high risk of debt distress and was therefore eligible to receive 100% of its ADF allocation as grants.

11 5 The implementing agencies will be the TERM Agency 7 and TPL. The Tonga Energy Road Map Implementation Unit (TERM-IU) within the TERM Agency will oversee the implementation of the project. The government has made the TERM-IU the energy sector cross-cutting implementing entity. TPL has hands-on expertise important to the project due to its power engineering knowledge and includes the project management unit. Such project activities as the final technical design and bidding process will be conducted by TPL, assisted and supervised by ADB. Social and environmental safeguards will be conducted by TPL, assisted by PMCs and periodically reviewed by ADB. A contractor will undertake the construction, assisted by TPL and the PMCs, and periodically reviewed by ADB. O&M will be conducted by TPL and the PMCs. The government, through TPL, will own the project assets, with all benefits being made available by means of a transparent and auditable costing and pricing methodology. The implementing agencies, assisted by the EPU of the MLECCNR, and the PMCs will be responsible for the final engineering designs, supervised by ADB To ensure that the project effectively assists all stakeholders and beneficiaries, ADB will recruit the international team of PMCs to help all parties understand O&M procedures for onand off-grid solar power plants for 5 years after plant commissioning. TPL will be assisted by the PMCs during detailed engineering. The project component will allow TPL to acquire key knowledge and further develop its own solar power O&M capacity. A project steering committee chaired by the MFNP and composed of the MLECCNR, the EPU, Ministry of Public Enterprises, TPL, and the TERM-IU will oversee the project, support sustainability, and ensure effective assistance to all project stakeholders and beneficiaries. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual. 9 Table 3: Implementation Arrangements Aspects Arrangements Implementation period August 2013 December 2019 Project completion date 31 December 2019 Management Outer Island Renewable Energy Project Steering Committee: (i) Oversight body Ministry of Finance and National Planning (chair); secretary of the MLECCNR, head of EPU (MLECCNR), secretary of the MPE, head of Tonga Power Limited; head of the TERM-Implementing Unit (members) (ii) Executing agency Ministry of Finance and National Planning (iii) Implementing agencies TERM-Agency and Tonga Power Limited (iv) Implementation consultant The PMC will be supported by a team of specialized experts. Procurement ICB 1 contract $5.42 million Shopping 7 contracts $0.63 million Consulting services (PMC) FBS 30 person months (intermittent) $0.75 million Advance contracting Disbursement Advance contracting will be undertaken. All grant proceeds will be disbursed in accordance with ADB s Loan Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. ADB = Asian Development Bank, EPU = energy planning unit, FBS = fixed business selection, ICB = international competitive bidding, MLECCNR = Ministry of Lands, Survey, Environment, Climate Change, and Natural Resources, MPE = Ministry of Public Enterprises, PMC = project management consultants, TERM = Tonga Energy Road Map. Source: Asian Development Bank. 7 The TERM Agency is the government agency accountable directly to Cabinet, and responsible for achieving the objectives of the TERM. 8 Since the project is financed with ADB-administered cofinancing resources as well as ADF resources, universal procurement will apply. ADB Blanket Waiver of Member Country Procurement Eligibility Restrictions in Cases of Cofinancing for Operations Financed from Asian Development Fund Resources. Manila. 9 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

12 6 III. DUE DILIGENCE A. Technical 20. The project has been assessed as technically viable, based on extensive study of the load and energy demand records provided by TPL and field investigations. The equipment has been carefully analyzed, based on best engineering practices and trends in the solar industry. It is designed in line with quality standards specifically conceived for hard marine environments and remote island conditions. In the case of power plants connected to TPL grids, the design calls for the project to provide complete preassembled solar photovoltaic generators; middle voltage switch gear and control equipment; and, in the case of the outer islands, compact, maintenance-free (up to 90%) photovoltaic solutions. All equipment has been designed with remote control, monitoring, and protection systems standard in the solar industry. This will save up to 80% of the usual O&M costs and requirements for technical personnel. The PMCs will provide specialized O&M and knowledge transfer to executing and implementing partners, with a particular focus on the integration of other power projects and ensuring sustainable operation. 21. The capacity of the project s new solar systems is small enough to be smoothly integrated into the existing diesel-powered networks, particularly in Ha apai and Eua. On Vava u, the ADB project s 400 kwp new solar plant will operate together with the 500 kwp solar plant being financed by the United Arab Emirates as one unit. The combined 900 kwp solar power installation will supply about 30% of the peak load in Vava u. The technical designs for both plants include battery storage to allow the solar power capacity to be balanced with and integrated into the existing network, absorb solar intermittence during the day, and store energy to partially supply peak loads during early night. This will create a sustainable, stable, reliable electricity system. The size of the project plant s battery bank is economically and financially sound and will not create an excess of energy. It will also allow the decommissioning up to four of six existing diesel generators on the network. It will also enable the remaining diesel units to perform at their optimum fuel consumed electricity generated ratio, contributing to the utility s least cost development. B. Economic and Financial 22. All financial costs and benefits have been expressed in January 2013 prices. The project financial analysis quantifies costs and benefits of the project for the implementing agency of the project and for the investment project as a whole. Project financial costs include (i) the initial costs of the hardware and electrical works needed for the installation and integration of the solar power plant with the existing electrical grid; (ii) annual and periodic O&M expenditures, excluding for those needed replacement parts; and (iii) consulting services required for design, tendering, training, and project supervision. The financial costs exclude the price contingencies. 23. A financial appraisal of the project was undertaken using with- and without-project scenarios over a 20-year operational period, with the residual value at the end of this period assumed as zero. In the interest of a conservative analysis, no tariff increase was assumed. The project s financial internal rate of return (FIRR) is estimated to be 9.46%. This compares favorably with the estimated weighted average cost of capital at 0.76%, indicating that the project is financially viable. The sensitivity tests showed robust results for all scenarios, with the resulting FIRRs exceeding the weighted average cost of capital of 0.76%. Sensitivity analyses were undertaken on the financial and economic results to examine the impacts of the following changes to key assumptions and project risks: (i) an implementation delay of 1 year, (ii) a 10% reduction in solar power generation, (iii) a 15% reduction in solar power generation, (iv) an

13 7 increase in replacement costs of 10%, (v) a drop in diesel prices by 10%, (vi) a 10% increase in diesel prices, and (vii) a combination of a 15% reduction in generation and increase in replacement costs of 10%. The project remains financially viable under these scenarios, with FIRRs of 7.62% 9.46% The average levelized cost of electricity (LCOE) was calculated for the solar photovoltaic assets in the nine outer islands and is estimated to be $0.27/kWh. The LCOE was calculated within a conservative scenario to highlight the benefit of the project. The components of the LCOE are (i) depreciation on a straight-line basis to permit TPL and EPU to replace the entire power plant after 20 years of asset life; (ii) O&M expenses for O&M staff and sundry items required for the successful operation of the plant; (iii) a sinking fund for replacement components, which should contribute to replacing the major parts during the life of the plant; and (iv) a residual value of the plant after the project equal to zero. 25. Table 4 shows the with- and without-project tariff comparison for the TPL concession area and with- and without-project monthly fee for electricity services for the areas not regulated by the government. It demonstrates the pro-poor nature of this project. Table 4: Cost of Electricity With and Without the Project ($/kwh) Island Payment Type Current TPL Tariff (Without Project) LCOE (With Project) Difference Vava'u, 'Eua, and Ha'apai Tariff Outer Ha'apai islands Fee for electricity Niuas Services kwh = kilowatt-hour, LCOE = levelized cost of electricity, TPL = Tonga Power Limited. Source: Asian Development Bank estimates. 26. Economic analysis was undertaken for the solar photovoltaic projects by comparing the discounted costs and benefits under the with- and without-project scenarios during in constant 2013 prices. The without-project case represents a continuation of the existing situation, and the with-project case represents the project investment scenario. The economic internal rate of return (EIRR) is estimated to be 17.24%. The EIRR compares favorably with the 12% economic opportunity cost of capital, and the estimated weighted average cost of capital at 0.76%, indicating that the project is economically viable. Under several scenarios considered in the sensitivity analysis, the EIRR remains robust, with EIRRs of 13.86% 17.24%. C. Governance 27. Financial management. To facilitate cash flow during project implementation, the MFNP, as the executing agency, will approve withdrawal applications coming from the project management unit and submit them to ADB for direct payment for all project goods, works, and consultancy services. The MFNP will be assisted in this process by the PMCs. A public financial management performance assessment conducted in 2010 concluded that Tonga s public financial management system is based on a solid legal and regulatory framework and underpinned by a set of well-established expenditure control procedures covering wages and salaries, non-salary items, and procurement ADB Achieving Development Effectiveness in Weakly Performing Countries The Asian Development Bank s Approach to Engaging with Weakly Performing Countries. Manila; ADB ADB s Approach to Assisting the Pacific ( ). Manila. 11 Government of Tonga Public Financial Management Performance Report. Nuku alofa.

14 8 28. Procurement. The government has requested ADB to help in all processes for procuring all project goods, works, and services, and to recruit PMCs services to provide the related support. A procurement capacity assessment of TPL indicates that Tonga s procurement regulations and procedures are comprehensive, and that TPL has a functioning procurement unit, although the unit s experience in and qualifications for procuring solar equipment are limited. Procurement of goods, works, and related services under the project will be processed through TPL, with oversight by ADB, and carried out in accordance with ADB s Procurement Guidelines (2010, as amended from time to time). ADB will prepare technical specifications, bidding documents (according to its own format), and bidding evaluation forms for project procurement. TPL will conduct the bidding process. ADB will recruit the PMCs through fixed budget selection due to the complexity of the technological endeavor. Consultancy services will be procured in accordance with ADB's Guidelines on the Use of Consultants (2010, as amended from time to time). 29. Advance contracting will be undertaken in conformity with ADB s Procurement Guidelines. The borrower, implementing and executing agencies have been advised that approval of advanced contracting does not commit ADB to finance the project. Minor goods and services costing under the equivalent of $100,000 will be procured by the implementing agency through shopping procedures and the direct payment method. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and MFNP. The specific policy requirements and supplementary measures are described in the project administration manual. D. Poverty and Social 30. The social survey conducted during the project preparatory TA in April and July 2012 showed that communities in the outer islands identify lack of employment and other incomeearning opportunities as the main cause of hardship. Other causes cited included too many dependents, landlessness, the burden of family, community obligations, poor health, and poor family budgeting. The groups most vulnerable to hardship include children, youth, women, the disabled, and the elderly. The project will address hardship by reducing the monthly expenses for electricity services. In addition, in the case of Ha apai outer islands and Niuas, the project will contribute to promote development of local craft manufacturing and sustainable tourism, which will benefit the poor. 31. The project is classified as effective gender mainstreaming, with the majority of project outputs having specific gender design features to ensure that women participate in the project and have access to project benefits. The survey showed that the significant concerns of women include (i) affordability of urban services, (ii) improving power usage (conservation), (iii) improving the health and well-being of households and the community, (iv) having greater access to information on urban services and urban planning, (v) having greater involvement in developing solutions for communities through women s committee support, and (vi) being involved in consultation and decision making. The project gender action plan will address these concerns and ensure that any potential harmful effects on women are avoided. The gender action plan includes specific actions that will benefit women. 32. Key gender aspects have been assessed through gender analysis and community consultations. It was found that the project will not have any negative impact on women. The project will include the engagement of women in consultation activities; provision of gender awareness to target groups, including participation in income-generating activities; actions to

15 9 encourage women to participate in project-related contracts; and collection of gender-related data for monitoring purposes. E. Safeguards 33. Environment. The project is classified as environmental category B. Initial environmental examinations have been prepared in accordance with ADB s Safeguard Policy Statement (2009). No significant environmental impacts will result from the implementation of the proposed project. 34. Climate change. A climate risk profile for Tonga prepared by ADB in indicates that the main impacts of climate change are expected to be high sea levels, extreme winds, and extremely high air and water temperatures. The best estimates of long-term, systematic changes in the average climate for Tonga indicate that by 2050 the sea level is likely to rise by 36 centimeters; and the frequency of severe, short sea level rise resulting from storm surge (2.2 meters above mean sea level) will increase from a 1-in-580-year event to a 1-in-5-year event. The project will provide solar photovoltaic plants that are compact, preassembled, and resistant to marine environments, and thereby resilient to climate change. 35. Involuntary resettlement and indigenous peoples. The project has been classified as category C for involuntary resettlement and indigenous peoples under ADB s Safeguard Policy Statement. The project is not expected to involve land acquisition or restrictions on land use or access to designated parks or protected areas. The project facilities will be constructed in existing locations or on land owned by the government, TPL, or the individual owners of project facilities. No third party or persons will be adversely affected. 36. The project is not expected to impact any distinct and vulnerable group of indigenous peoples, as defined under ADB s Safeguard Policy Statement. The beneficiaries in the project sites are part of mainstream Polynesian society and are not considered to be distinct from the mainstream society. They are not discriminated against due to their language, skin color, or education level and do not require protection or special attention from the project. All project outputs will be delivered in a culturally appropriate, participatory manner. F. Risks and Mitigating Measures 37. Major risks and mitigating measures are summarized in Table 5 and described in detail in the risk assessment and risk management plan. 13 Mitigation measures are expected to outweigh the costs. Table 5: Summary of Risks and Mitigating Measures Risks The project could face a capital cost overrun. Implementation could be delayed, leading to cost overruns Mitigating Measures Adequate contingencies have been provided. Price variation conditions need to be built into the bid document and advance procurement initiated This risk can be mitigated by including positive incentives i.e. price bonuses for early commissioning in the bidding document and plug and play solutions 12 ADB Mainstreaming Environmental Considerations in Economic and Development Planning Processes in Selected Pacific Developing Member Countries: Climate Risk Profile for Tonga. Manila. 13 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

16 10 Risks A possible shortage of technical qualified staff in relevant implementing agencies could adversely affect the project implementation schedule. Low exposure to development of solar power projects in implementing agencies can adversely affect implementation of the project. Mitigating Measures The staffing shortage will be mitigated by the capacity augmentation provided by the PMC team, including a project manager to administrate the project, a project leader to implement the project, a project cocoordinator to coordinate logistics, a safeguards expert to facilitate land and resettlement aspects, and a financial specialist to manage financial aspects of the bidding process. The TPL and EPU are in the process of acquiring field experience in implementing solar power systems. The PMC team engaged for the project will support the learning process and facilitate the necessary coordination. EPU = Energy Planning Unit, PMC = project management consultant, TERM-IU = Tonga Energy Road Map Implementing Unit, TPL = Tonga Power Limited. Source: Asian Development Bank estimates. IV. ASSURANCES AND CONDITIONS 38. The government and the MFNP have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the project administration manual and grant documents. 39. The government and the MFNP have agreed with ADB on certain covenants for the project, which are set forth in the grant agreements. 40. As a condition to effectiveness of the grant from ADB s Special Funds resources, (i) the grant agreement from the Government of Australia for the cofinancing will have been duly executed and delivered, and all conditions precedent to its effectiveness (other than a condition requiring the effectiveness of the ADB grant) will have been fulfilled; and (ii) the subsidiary grant agreement between the government and TPL, in form and substance satisfactory to ADB, will have been duly executed and delivered on behalf of the government and TPL and will have become legally binding upon the government and TPL in accordance with its terms. V. RECOMMENDATION 41. I am satisfied that the proposed grants would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, recommend that the Board approve (i) (ii) the grant not exceeding $2,000,000 to the Kingdom of Tonga from ADB s Special Funds resources, for the Outer Island Renewable Energy Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant and project agreements presented to the Board; and the administration by ADB of the grant not exceeding the equivalent of $4,500,000 to the Kingdom of Tonga for the Outer Island Renewable Energy Project, to be provided by the Government of Australia. Takehiko Nakao 6 June 2013 President

17 Appendix 1 11 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Reduction of Tonga s dependence on imported fossil fuel for power generation Outcome On-grid and off-grid generation systems are optimized and provide increased consumer access to electricity generated by solar power at a reduced cost Performance Targets and Indicators with Baselines By 2018: Tonga s annual diesel imports for power generation are reduced by at least 480,000 liters overall: (i) Eua, Ha apai, and Va vau 300,000 liters; and (ii) Ha apai outer islands and Niuas 180,000 liters. (Baseline: 13.8 million liters of diesel consumed for power generation in 2011) At least 400 households are supplied with electricity generated from renewable systems: Eua, Ha apai, and Va vau 300 households; Ha apai outer islands and Niuas 100 households By 2015: At least 2,103 MWh of solar electricity is supplied to customers every year: Eua, Ha apai, and Va vau 1,314 MWh; Ha apai outer islands and Niuas 789 MWh About 1,700 tons of annual CO 2 emissions are avoided: Eua, Ha apai, and Va vau 1,063 tons; Ha apai outer islands and Niuas 638 tons. (Baseline: none) Data Sources and Reporting Mechanisms Yearly government statistical report of fuel consumption TPL annual report Yearly customs statistics on national imports TPL annual report TPL annual report TPL annual report Assumptions and Risks Assumptions Tonga s macroeconomic conditions are stable World oil price remains high and volatile making power generation not affordable Risks The reduction in diesel use by power sector is offset by increases in other sectors Resources are lacking to operate and maintain the project assets in a sustainable manner Assumptions Government continues to prioritize power sector investment and adheres to TERM targets Diesel generators continue to supply base load power Risks TPL continues to lack sufficient technical staff to operate and maintain its power generating assets The site selection process is politicized Outputs 1. Solar power. The project will construct and install solar power systems with a total capacity of 1.25 MWp on 9 outer islands of Tonga By the end of 2013: (i) Solar photovoltaic generators are connected to existing electricity distribution networks (0.2 MWp on Eua, 0.4 MWp on Vava u and 0.2 MWp on Ha apai) (ii) Solar photovoltaic generators are connected to existing community-owned and communitymanaged electrical minigrids on four Ha apai outer islands (70 kwp on 'Uiha, 70 kwp on Nomuka, 70 Project progress reports, TPL annual report Project progress reports, TPL annual report Environmental issues delay implementation Assumptions Cofinancing is timely TPL has sufficient capacity to implement and maintain the project The PMU is adequately staffed and budgeted The project coordinates closely with development partners

18 12 Appendix 1 Design Summary Performance Targets and Indicators with Baselines kwp on Ha'ano, and 70 kwp on Ha'afeva) (iii) 0.15 MWp in solar power capacity is connected to a newly installed distribution system in Niuatoputapu (iv) The solar home system capacity is expanded by installing additional 100 units of 200 watt peak SHS in Niuafo ou Data Sources and Reporting Mechanisms Project progress reports, TPL annual report Project progress reports, TPL annual report Assumptions and Risks Risks The price of raw materials and power plant components increases unexpectedly Government approval processes for procurement are slow The procurement process is weak 2. Operation and maintenance knowledge transferred through training 3. Project implemented and managed efficiently At least 65 households headed by women in Ha apai outer islands (50 households) and Niuas (15 households) will benefit from the project. (Baseline: 350 existing households) Women make up a targeted 30% of workforce for local construction contracts for solar power installations (i) Manual for solar electric equipment is finalized. (ii) Knowledge of solar electric and hybrid equipment is transferred during 5 years after commissioning of systems (i) Consultancy services are provided through the appointment of the PMC team, comprising 1 electrical engineer to act as project manager, 1 solar technical expert to act as field engineer, 1 financial and procurement specialist, and 1 safeguards specialist (ii) Continuous capacity building program is conducted for each group of islands for 5 years after systems commissioned. Training includes: (a) project planning and asset management and maintenance for staff of TERM-IU and TPL and existing community electric societies (with an expected minimum 50% female participants); (b) procurement, anticorruption, Project progress reports, TPL annual report Project progress reports, TPL annual report Project progress reports, TPL annual report Project progress reports, TPL annual report, training attendance sheets Project progress reports, TPL annual report, training attendance sheets Annual asset The PMU has rapid staff turnover Assumption Counterpart staff are willing to learn from the on-the-job training Risk Counterpart staff lack of interest in O&M training Assumptions PMC mobilized on time Counterpart staff are available and receive formal and on-the-job training Parallel cofinancing is available TPL prioritizes solar asset maintenance Risks Counterpart support, performance, and coordination are weak and inadequate Counterpart staff and communities lack interest in training program

19 Appendix 1 13 Design Performance Targets and Summary Indicators with Baselines safeguards, and O&M training for solar diesel hybrid energy systems (expected minimum of 50% female participants); (c) asset management concepts, theories, and practical project applications for staff of TPL and electric societies; (d) asset management program for staff of TPL and electric societies (expected minimum of 10% female participants); (e) Efficient use by management of solar power services for customers of TPL and electric societies; (f) Consumer training on power budget management for each of nine outer islands (expected minimum of 50% female participants); and (g) DSM for customers of TPL and electric societies (expected minimum of 50% female participants) Activities with Milestones Data Sources and Reporting Mechanisms maintenance plan Inputs Assumptions and Risks 1. Install and Commission 1.25 MWp Solar Power Capacity in the Project Areas 1.1 Carry out tender process for procurement of equipment: (i) solar power equipment, structures, balance of system and plant, and synchronizing devices to a diesel power plant; and (ii) small-scale solar compact standalone equipment (January May 2014) 1.2 Evaluate and report on bids, and award contracts (June 2014) 1.3 Install, test, and commission systems, including trial operation of equipment (August December 2014) Asian Development Bank (ADF): $2.00 million Government of Australia: $4.50 million Government: $0.30 million 2. Conduct Operation and Maintenance Training 2.1 Design O&M program 2.2 Conduct O&M training for solar electric and hybrid equipment for 5 years after commissioning (Q Q4 2019) 3. Provide Efficient Project Implementation and Management 3.1 Recruit and field PMC team (June July 2013) 3.2 Prepare detailed project implementation schedule, technical designs, safeguards, and GAP components (July December 2013) 3.3 Develop and implement capacity strengthening program for staff of TERM-A, TERM-IU, EPU, TPL, community electricity societies; and for TPL customers (every year until 2018) 3.4 Evaluate training programs and report (once a year until 2019) 3.5 PMC teams prepare final report after 5 years of activities (Q4 2019) ADB = Asian Development Bank, AusAID = Australian Agency for International Development, CO 2 = carbon dioxide, DSM = demand side management, GAP = gender action plan, kwp = kilowatt-peak, MWh = megawatt-hour, MWp = megawatt-peak, O&M = operation and maintenance, PMC = project management consultant, PMU = project management unit, PPTA = project preparatory technical assistance, SHS = solar home system, TPL = Tonga Power Limited, TERM-A = Tonga Energy Road Map agency, TERM IU = Tonga Energy Road Map implementation unit. Sources: Asian Development Bank estimates.

20 14 Appendix 2 LIST OF LINKED DOCUMENTS 1. Grant Agreement: Special Operations 2. Grant Agreement: Externally Financed 3. Project Agreement 4. Sector Assessment (Summary): Energy 5. Project Administration Manual 6. Contribution to the ADB Results Framework 7. Development Coordination 8. Financial Analysis 9. Economic Analysis 10. Country Economic Indicators 11. Summary Poverty Reduction and Social Strategy 12. Gender Action Plan 13. Initial Environmental Examination 14. Risk Assessment and Risk Management Plan