Page 1 INTEGRATED SAFEGUARDS DATASHEET APPRAISAL STAGE I. Basic Information Date prepared/updated: 10/30/2008 Report No.: 46330 1. Basic Project Data Country: Honduras Project ID: P104034 Project Name: Power Sector Efficiency Enhancement Project (PROMEF) Task Team Leader: Fernando Lecaros Estimated Appraisal Date: September 8, 2008 Estimated Board Date: January 27, 2009 Managing Unit: LCSEG Lending Instrument: Specific Investment Loan Sector: Power (100%) Theme: Infrastructure services for private sector development (P) IBRD Amount (US$m.): 0.00 IDA Amount (US$m.): 30.00 GEF Amount (US$m.): 0.00 PCF Amount (US$m.): 0.00 Other financing amounts by source: BORROWER/RECIPIENT 13.20 13.20 Environmental Category: B - Partial Assessment Simplified Processing Simple [] Repeater [] Is this project processed under OP 8.50 (Emergency Recovery) or OP 8.00 (Rapid Response to Crises and Emergencies) Yes [ ] No [X] 2. Project Objectives 2. Project Objectives The project development objec tive is to improve ENEE’s (the Government-owned Honduran electricity company Empresa Nacional de Energía Eléctrica) operational and financial performance, thus contributing to the sustainability of the power sector in Honduras. High technical and non-technical losses and poor bill collection have limited ENEE's revenue and, together with insufficient tariffs and badly targeted subsidies, are the main shortcomings in the power sector. The underperformance of ENEE has the potential for two major negative consequences: (a) the company has posted balance sheet losses for the last years, with a deficit above 2% of GDP, which threatens the stability of the macroeconomic framework and the prospects for poverty reduction; and (b) the availability of adequate power production is seriously compromised as already evident by the current rolling blackouts and could undermine the performance of the economy as a whole. Furthermore, private generation companies have cumulated large arrears with ENEE, which are seriously threatening the stability of the domestic financial market given the large exposure of the commercial Page 2 banks. For these reasons, the resolution of ENEE problems is at the core of the policy dialogue of IDA with the Government under the Poverty Reduction Support Credit (PRSC) which includes a number of actions oriented towards improving the performance of the power sector. In consistence with these concerns, the Bank financed a power subsector study which provides a comprehensive power sector diagnostic and outlines a number of options to address the short and medium term issues. As highlighted in the study, the main issues underlying ENEE's problems include (a) institutional instability associated with frequent management changes as well as a weak governance framework, (b) inadequate revenue generation due to large non-technical (commercial) losses and poor bill collections, (c) a tight supply/demand balance and (d) power tariffs which are below cost, together with untargeted subsidies. Proposed project development objectives: The main Project Development Objective is to improve ENEE’s operational and financial performance, thus contributing to the sustainability of the power sector in Honduras. Proposed performance indicators for the project would include: (i) Increase in cash recovery index (CRI) in each of the three distribution regional sub- networks (notably through a diminution in losses). The CRI formula is: (energy billed by distribution company/ energy purchased by distribution company) multiplied by (electricity billings paid by consumers/total electricity billings issued to consumers). (ii) Decrease in SAIDI (System Average Interruption Duration Index) and SAIFI (System Average Interruption Frequency Index) nationwide; (iii) Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA). 3. Project Description Preliminary Project Description The project would respond to the difficulty in improving metering, billing and collection due to: (a) the lack of an organization and a distribution management model oriented towards an integrated administration of clients, and (b) the poor quality of ENEE's information systems regarding commercial management and responding to client complaints. The proposed approach differs from ENEE's current loss-reduction measures, which are based upon detection and penalization of fraud; while these measures may yield some short run benefits, they are neither efficient nor sustainable. The project would emphasize a strategy based upon remote metering for all large clients which has proved successful elsewhere and has been successfully applied to a limited extent in the San Pedro Sula region in Honduras. During the project preparation, a governance assessment has been carried out for ENEE with the view of identifying governance reforms to improve transparency and Page 3 accountability of the utility and reduce the political interference in its administration. Project implementation arrangements will also reflect these elements. Project Scope The proposed project would support the following components: Component 1: Improvement of ENEE´s commercial and corporate resource management The objective of this component is to improve the commercial performance of ENEE in a sustainable manner by providing the company with the information tools for a modern and efficient management of its customers and of the services it provides. The project will finance: (a) installation of automated meter reading equipment, (b) installation of a new automated commercial management system (CMS), (c) implementation of an incident recording and management system (IRMS), (d) development of a corporate resources management information system (CRMIS) for ENEE, and (e) a permanent office space for ENEE to house these systems and related employees. Component 2: Rehabilitation of distribution networks This component aims to improve the reliability and reduce technical losses in ENEE´s distribution systems by strengthening the distribution grid, substations, and distribution equipment for supervisory control, voltage control and switching. A recent national survey of Persistent Organic Pollutants, POPs, as defined by the Stockholm Convention, identified the electric sector in Honduras as having the largest stock of PCB contaminated equipment. The total number of contaminated units (with PCB concentrations above 50 ppm) is estimated to be above 500. The Project will support ENEE’s action plan for the removal of all PCB contaminated units in the electric system. This component is composed of investment plans in three regions: (i) Center-South, (ii) North-West and (iii) Atlantic Coast. Each Plan is in turn divided into two categories: (i) replacement of transformers and disposal of PCBs, and (ii) maintenance equipment, mainly heavy vehicles. Given the limited IDA resources, this project will primarily focus on replacement of transformers and identification and replacement of PCB-containing equipment. The rest of the investments will be carried out in parallel when more resources become available. Since most of the investments are for operation and maintenance purposes, this phased approach is feasible Component 3: Strengthening of ENEE´s institutional capacity This component will support: (i) strengthening power sector governance, (ii) analyzing financial sustainability of ENEE, including tariff structure and subsidies and development of a strategy for commercial operations, (iii) implementing a communication, outreach and participation program, and (iv) project management, monitoring and evaluation. Page 4 4. Project Location and salient physical characteristics relevant to the safeguard analysis The project coverage is national. The only component with physical characteristics relevant to the safeguard analysis is component 2. Actions to strengthen the distribution grid in the three sub-regions of the country have been prioritized based on their urgency and contribution to ENEE revenue stream. 5. Environmental and Social Safeguards Specialists Ms Maria E. Castro-Munoz (LCSSO) Mr Alejandro M. Deeb (LCSEN) 6. Safeguard Policies Triggered Yes No Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X Physical Cultural Resources (OP/BP 4.11) X Indigenous Peoples (OP/BP 4.10) X Involuntary Resettlement (OP/BP 4.12) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X II. Key Safeguard Policy Issues and Their Management A. Summary of Key Safeguard Issues 1. Describe any safeguard issues and impacts associated with the proposed project. Identify and describe any potential large scale, significant and/or irreversible impacts: Environmental Category "B" The project is expected to be largely beneficial to the environment, as improvements on continuity and reliability of service will reduce the need for individual energy sources, which are often a major source of air and noise pollution. The project has national coverage in urban areas. The project is not expected to produce major or irreversible environmental impacts. Electric distribution projects do not represent a threat to the environment, as is the case for this project. The project will support the identification, replacement and disposal of equipment with PCBs, an activity that requires special environmental controls. It is estimated that the public electric distribution system in Honduras may have more than 500 units have PCBs with concentrations above 50 ppm and thus require special environmental handling. ENEE has elaborated a “Plan for Replacement and Handling of PCBs”, which is included in the “Environmental Guidelines for Distribution Projects” that will be adopted by the company for all its distribution projects. Page 5 ENEE’s Plan for PCBs will adopt the international environmental guidelines (TheStockholm Convention) for PCB disposal, which will also be included in Hondura’s“National Plan for PCBs”, currently under development by SERNA (Ministry of Environment). ENEE’s “Plan for Replacement and Handling of PCBs” includes the following activities: (i) completion of the inventory of PCB containing equipment, (ii) identification of sites contaminated with PCBs, (iii) purchase of sampling equipment, (iv) provision of information, capacity building and training for ENEE’semployees, (v) verification that temporary storage of PCB containing equipment is made following appropriate safety procedures, (vi) final disposal of PCB containing equipment according to international guidelines. A special Commission will be created to oversee all the activities related to PCB management and disposal. This Commission will be composed of representatives of ENEE, SERNA, the Health Secretariat, the Firefighters, and private sector and/or professional associations’ representatives. Other safeguard issues (forests, involuntary resettlement, safety of dams, pest management, natural habitats, project in disputed areas, physical cultural resources and project in international waterways) would not be triggered by the proposed project. Social safeguards The project will not trigger any of the social safeguards as corroborated by the environmental assessment. Indigenous peoples communities, located mainly in the rural areas, might benefit from the rehabilitation of distribution networks Center-South and at the Atlantic Coast. Adjusted tariff will not have an impact since electricity consumption of these communities in the rural areas is below 100 kWh/month, therefore, they will continue receiving a subsidy. Proposed rehabilitation works under the project will not cause any physical impact causing resettlement or affecting cultural assets. 2. Describe any potential indirect and/or long term impacts due to anticipated future activities in the project area: The electric sector, in general, has developed a set of well defined and environment friendly procedures for handling and destroying PCB contaminated equipment. The national removal of all PCB contaminated units from the sector is a crucial first step towards a country free of PCB potential contamination. It should be highlighted the importance of supporting the GOH in its effort to eventually remove all PCB contaminated units in its electric system. 3. Describe any project alternatives (if relevant) considered to help avoid or minimize adverse impacts. 4. Describe measures taken by the borrower to address safeguard policy issues. Provide an assessment of borrower capacity to plan and implement the measures described. The Ministry of Environment (SERNA), with support from UNDP, has produced a national PCB inventory. Building upon this inventory, SERNA is elaborating a National Action Plan to manage equipment containing or likely to contain PCBs as part of a more Page 6 comprehensive set of regulations for hazardous chemical waste management that is being prepared by SERNA with the support of USAID. 5. Identify the key stakeholders and describe the mechanisms for consultation and disclosure on safeguard policies, with an emphasis on potentially affected people. Elaboration of the overall National Action Plan for POPs and in particular for PCBs is led by CESCCO, the Center for Study and Control Pollutants (Centro de Estudios y Control de Contaminantes) at SERNA. The National Hydrological Resources Directorate, the Environmental Control and Evaluation Directorate, the Environmental Management Directorate and the Biodiversity Directorate, all of them within SERNA, are also involved in the elaboration of the National Plan. Consultations and participation through the process of elaboration of the National Plan have included the following institutions: ENEE (National Electricity Utility – Empresa Nacional de Energía Eléctrica), SOPTRAVI (Public Works, Transport and Housing Secretariat - Secretaría de Obras Públicas, Transporte y Vivienda), Health Secretariat, DEI (Executive Imports Directorate – Dirección Ejecutiva de Ingresos), Ministry of Foreign Affairs (Cancillería General de la República), Foregin Affairs Secretariat (Secretaría de Relaciones Exteriores), SENASA (National Service for Agricultural Health – Secretaría Nacional de Salud Agropecuaria), UNAH (National University – Universidad Nacional de Honduras), UNICAH (Catholic University – Universidad Católica), National Center for a Cleaner Production (Centro Nacional de Producción Más Limpia), ANDI (National Association of Industrialists – Asociación Nacional de Industriales), COHEP (Honduran Corporation of Private Companies – Corporación Hondureña de la Empresa Privada), Cáritas de Honduras (NGO), Fundación Vida (NGO). The consultation process is expected to conclude by December 15, 2008. B. Disclosure Requirements Date Environmental Assessment/Audit/Management Plan/Other: Was the document disclosed prior to appraisal? Yes Date of receipt by the Bank 09/26/2008 Date of "in-country" disclosure 10/10/2008 Date of submission to InfoShop 10/13/2008 For category A projects, date of distributing the Executive Summary of the EA to the Executive Directors Resettlement Action Plan/Framework/Policy Process: Was the document disclosed prior to appraisal? Date of receipt by the Bank Date of "in-country" disclosure Date of submission to InfoShop Indigenous Peoples Plan/Planning Framework: Was the document disclosed prior to appraisal? Date of receipt by the Bank Date of "in-country" disclosure Page 7 Date of submission to InfoShop Pest Management Plan: Was the document disclosed prior to appraisal? Date of receipt by the Bank Date of "in-country" disclosure Date of submission to InfoShop * If the project triggers the Pest Management and/or Physical Cultural Resources, the respective issues are to be addressed and disclosed as part of the Environmental Assessment/Audit/or EMP. If in-country disclosure of any of the above documents is not expected, please explain why: C. Compliance Monitoring Indicators at the Corporate Level (to be filled in when the ISDS is finalized by the project decision meeting) OP/BP/GP 4.01 - Environment Assessment Does the project require a stand-alone EA (including EMP) report? Yes If yes, then did the Regional Environment Unit or Sector Manager (SM) review and approve the EA report? Yes Are the cost and the accountabilities for the EMP incorporated in the credit/loan? Yes The World Bank Policy on Disclosure of Information Have relevant safeguard policies documents been sent to the World Bank's Infoshop? Yes Have relevant documents been disclosed in-country in a public place in a form and language that are understandable and accessible to project-affected groups and local NGOs? Yes All Safeguard Policies Have satisfactory calendar, budget and clear institutional responsibilities been prepared for the implementation of measures related to safeguard policies? Yes Have costs related to safeguard policy measures been included in the project cost? Yes Does the Monitoring and Evaluation system of the project include the monitoring of safeguard impacts and measures related to safeguard policies? Yes Have satisfactory implementation arrangements been agreed with the borrower and the same been adequately reflected in the project legal documents? Yes Page 8 D. Approvals Signed and submitted by: Name Date Task Team Leader: Mr Fernando Lecaros 10/08/2008 Environmental Specialist: Mr Alejandro M. Deeb 10/08/2008 Social Development Specialist Ms Maria E. Castro-Munoz 10/14/2008 Additional Environmental and/or Social Development Specialist(s): Approved by: Regional Safeguards Coordinator: Mr Reidar Kvam Comments: Approval not required Sector Manager: Mr Philippe Charles Benoit 10/08/2008 Comments: