Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower Implementing Agency Report No. PID6033 Lao PDR-Southern Provinces Rural... Electrification Project East Asia and Pacific Power Sector LAPE44973 Date this PID prepared October 1997 Project Appraisal Date November 1997 Projected Board Date March 1998 Country and Sector Background Lao People's Democratic Republic (Lao PDR) Electricite du Laos (EdL) Contact: Mr. Viraphonh Viravong, EdL Director General Telephone: Fax: The underdeveloped state of rural infrastructure in Lao PDR is a major constraint to rural economic growth and poverty alleviation. Only 8t of rural Lao households are connected to the electricity grid, versus over 60t in Vientiane (capital of Lao PDR). Households which are not connected to the grid pay high prices for electricity (for example, electricity from automotive batteries costs at least US$2/kWh). Alternative sources of lighting (typically, diesel wick lamps and sawdust torches) do not provide sufficient light for productive tasks such as reading or weaving. These factors suggest that the lack of electricity in rural areas contributes to rural poverty, which at 53t is twice that in urban areas. To help relieve the urban rural disparities and to support broadbased growth, the Government and Electricite du Laos (EdL), the national power utility, have undertaken investments in electrification of rural provinces, including two IDA projects which have supported the electrification of about 20,000 households (Southern Provinces Electrification, Credit 1826-LA, completed in 1994, and Provincial Grid Integration (PGI), Credit 2425-LA, ongoing). These projects have demonstrated that electrification significantly increases opportunity for value adding activities. The next step in the Government's program is the electrification of 88,000 households by the year 2000, largely through extension of the national distribution grid operated by EdL. In remote areas where grid extension is not economically viable, cost-effective methods of off-grid electrification will be piloted, and a plan developed to implement successful pilots on a larger scale. The proposed project would assist in these efforts. Although EdL has consistently been profitable, its domestic business operates at a loss which is cross-subsidized by its profits on

2 electricity exports. Three key reasons for this poor performance are low domestic tariffs, poor billing and collection performance, and high transmission and distribution losses. More generally, EdL lacks incentives to operate on a commercial basis. The Government and EdL are taking action to remedy these financial problems. The Government approved a 70t increase in domestic tariffs (to about 60 K/kWh or 3.7 USc/kWh on a weighted-average basis) effective October 1, To improve billing and collections, EdL is modernizing its financial procedures and systems. To reduce transmission and distribution losses, EdL is replacing 28,000 defective meters in Vientiane. To improve EdL's commercial incentives, the Government has appointed a Board of Directors of EdL (December 1996) and passed a basic Electricity Law (May 1997), and is in the process of corporatizing EdL and negotiating a Performance Contract to permit EdL to operate at arm's length from the Government. Project Objectives The Project's main development objectives are: (a) to expand access to electricity in rural areas in 7 southern provinces of Laos, through grid extension and off-grid electrification, where economically justified; and (b) to strengthen EdL's capacity to plan and implement electrification investments and to manage its operations on a commercial basis. These objectives are consistent with IDA's Country Assistance Strategy for Lao PDR, which calls for a project to finance "the development of distribution networks to extend grid-supplied electricity to areas where some economic activity needs to be supported." Project Description In line with the Government's strategy and the project objectives, the project will support the least-cost electrification of some 55,000 households in seven central and southern provinces of Lao PDR: Bolikhamsai, Khammouane, Savannakhet, Saravane, Champassak, Attopeu, and Sekong. The project will consist of the following three components: a. Distribution Extension Component (US$ 31.7 million). Extension of the national electricity grid to about 50,000 households through the construction of about 50 km of high-voltage (115 kv) subtransmission lines, 12 MVA of 115/22 kv transformer capacity, 1200 km of medium-voltage (22 kv) lines, 800 km of low-voltage (380 V) lines, 34 MVA of 220/380 kv distribution transformers and 50,000 meters. It will also pilot the use of low-cost single wire earth return (SWER) systems in rural areas. This will complement similar investments in the northern provinces supported by the Asian Development Bank (ADB). b. Off-Grid Rural Electrification Component (US$ 2.2 million). Demonstration projects for off-grid electrification in about 46 rural communities which are unlikely to be connected to the grid for 10 years or more will be executed. About 20 diesel mini-grids, 6 micro-hydro mini-grids and 20 solar battery charging stations will be financed. -2-

3 c. Institution Building Component (US$ 3.9 million). Technical assistance and related equipment to EdL and the Ministry of Industry and Handicrafts (MIH) for: (a) construction supervision consultants to assist and train EdL in project management and procurement; (b) equipment including vehicles for supervision and maintenance, computers and software for billing and collections, and other office equipment; (c) financial consultants to assist EdL in financial management; (d) specialized consultants to assist EdL and MIH in regulatory and technical matters. Project Financing Total financing required for the project is about US$37 million equivalent with a foreign exchange cost of about US$27 million equivalent. The proposed credit would finance about US$33 million of the project cost; cofinancing from GEF and ESMAP is being sought for about US$1 million. The balance of project cost would be financed by EdL through internal cash generation and (for Off-Grid component works) village operators. About 87T of the proposed IDA Credit would be used for procurement of goods and works under International Competitive Bidding. About 109 of the IDA credit would be used for financing consulting services which would be employed following the Bank guidelines. The transmission lines and substations would be installed under one single-responsibility contract. Materials for distribution extension would be procured through 5 packages; installation would be undertaken by contractors. Project Implementation EdL will be full responsible for implementing the project. Its Projects Office will be responsible for overall project management (including engineering, procurement and disbursement) and will directly manage the Distribution Expansion component. EdL's Electrical Construction and Installation (ECI) Branch will manage the Off-Grid component under the general guidance of the Projects Office. Consultant assistance will be provided for all aspects of project implementation. A Performance Contract (to be signed by Ministry of Industry and Handicraft (MIH), Ministry of Finance and EdL as a condition of negotiations) establishes targets for EdL's technical, commercial and financial performance, and provides for monitoring of compliance by MIH and IDA. Project Sustainability The technologies for the Distribution Extension component are well proven and EdL has experience in implementing them. EdL's technical managers will receive training abroad in implementing these technologies (under the ongoing IDA-financed PGI project) and consultants will assist in project management. The technologies used in the Off-Grid component are also proven and a resident advisor will provide full-time support in their implementation. These elements will ensure the project's technical sustainability. -3 -

4 The physical components of the project form part of EdL's least-cost development plan and have robust economic returns. The project would therefore be economically sustainable. The management of EdL is being strengthened, and its financial performance improved, through the consultant services and equipment to be provided under Institutional Building component, and through domestic tariff increases. These measures will contribute to the project's financial and institutional sustainability. Lessons from Previous IDA Involvement EdL's experience with two previous IDA projects suggests that their staff needs to be supported with consultant assistance, and that operating procedures need to be formalized. Consultants will therefore provide continuous assistance in all aspects of project implementation. Contract packaging has been simplified to facilitate implementation (e.g. turnkey contract for transmission systems; distribution expansion works grouped into two contracts; advance preparation of tender documents). Under the project, EdL will formalize its commercial systems and procedures, including auditing procedures and computerized billing and collections systems; and EdL will be held accountable for meeting financial and technical targets under the Performance Contract. A Bank review of rural electrification (Rural Electrification: A Hard Look at Costs and Benefits, OED Precis, May 1995) recommends strengthening the economic and financial appraisal of projects, including consideration of alternative energy sources. Grid extension was selected only where it was the least-cost technology and where it was considered economically viable under conservative assumptions for economic costs and benefits. Otherwise off-grid solutions will be considered. Grant assistance is being sought to nurture the development of these alternative energy sources. IDA experience with off-grid projects has confirmed the usefulness of demonstration projects in removing information barriers, and the importance of community participation and cost recovery (Best Practices for Photovoltaic Household Electrification Programs, World Bank Technical Paper No. 324, 1996). The off-grid component is conceived as a demonstration project, and is being undertaken in close consultation with communities and community-based operators on the basis of full cost recovery. Compensation and Resettlement The project is not expected to require resettlement. The distribution lines will be placed along roads and other extant public rights of way. The transmission lines will be placed over largely uninhabited land. Land acquisition necessary for the placement of pylons (for the 50-km subtransmission route) will be done in accordance with a policy document to be approved by the Government and IDA which sets out the principles and procedures to be applied for compensation. During project preparation, IDA assisted EdL in establishing policies and procedures for right-ofway acquisition for transmission projects. This will set the ground - 4 -

5 rules for compensation in compliance with international standards set by donor agencies. Environmental Implications The project has been assigned Environmental Category B. The detailed engineering and design study provides an assessment of the environmental impact of the project. This has confirmed that the project does not affect any ecologically sensitive areas and poses no major environmental issues. Bidding documents will be reviewed by IDA to ensure that adequate provisions are included to ensure that the works will be executed in an environmentally acceptable manner. Project Objective Codes and Inputs (%) Major Sector Power 100l Poverty (10%) Human Resources Development (10%) Economic Management (10%) Environment (10%) Financial Institutions (0) Infrastructure (50%) Women in Development (0%) Debt Adjustment (0%) Natural Resources (0%) Sector Reform (10%) Contact Point: The World Bank InfoShop 1818 H Street, N.W. Washington, D.C Telephone: (202) Fax: (202) Note: This is information on an evolving project. Certain activities and/or components may not necessarily be included in the final project. Processed by the World Bank InfoShop week ending February 27,

6 Annex Environmental Project Cost: US$33 million equivalent Major Project Components: The proposed investment will pilot the extension of the national electricity distribution grid to about 50,000 households through the construction of about 47 km of subtransmission lines (115 kv), 12 MVA of 115/22 kv transformer capacity, 1200 km of medium-voltage (22 kv) lines, 800 km of low-voltage (380 V) lines, 34 MVA of 220/380 kv distribution transformers and 50,000 meters. The project will also pilot off-grid electrification in about 46 remote communities using diesel and micro-hydro mini-grids as well as solar battery charging stations, and will finance consultant services and equipment for institution building. Project Location: The project will expand electricity service in seven southern Lao provinces (Bolikhamsai, Khammouane, Savannakhet, Saravane, Champassak, Attopeu, and Sekong), primarily in locations adjacent to the area served by the ongoing Provincial Grid Integration project. The subtransmission line will extend from Pakbo substation in Savannakhet 47 km eastward to Champhone. The transmission route does not traverse environmentally- or ecologically-sensitive areas. Major Environmental Issues: None. Environmental Issues: Minor environmental disruption would occur in the vicinity of the 52-km, 115-kV line, primarily during construction, due to the need to clear vegetation from the right-of-way (ROW) and access roads, and to handle spoil from erection of poles. Operation and maintenance of the line may involve chemical or mechanical control of vegetation along the ROW and occasional line repair and maintenance. Proposed Actions: The Project Implementation Plan includes analysis of environmental impacts as well as proposed contractual provisions and operating procedures to mitigate them. The construction impacts will be mitigated through appropriate environmental provisions in the turnkey construction contract, which is subject to prior review by IDA. Contractual provisions would include the appointment of a member of the contractor's management team to monitor and report on compliance with mitigation measures. An appropriate Governmental agency would provide periodic oversight of compliance

7 Justification/Rationale for Environmental Category: The project will have only minor, local environmental impacts. The impacts will be mitigated using known, standard techniques, including contractual provisions executed by experience contracts