Document of The World Bank Report No: 64798 v1 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF POWER SECTOR EFFICIENCY ENHANCEMENT PROJECT (PROMEF) PROJECT LOAN JANUARY 22, 2009 TO THE REPUBLIC OF HONDURAS SEPTEMBER 27, 2011 ABBREVIATIONS AND ACRONYMS ENEE Empresa Nacional de Energia Electrica PDO Project Development Objective UAP-SDP Unidad Administradora de Proyectos de la Secretaría del Estado en el Despacho Presidencial UEP-ENEE Project Executing Unit in the Empresa Nacional de Energia Electrica Regional Vice President: Pamela Cox Country Director: Carlos Felipe Jaramillo Sector Manager / Director: Philippe Charles Benoit Task Team Leader: Rigoberto Ariel Yepez-Garcia 2 HONDURAS POWER SECTOR EFFICIENCY ENHANCEMENT PROJECT (PROMEF) P104034 CONTENTS Page A. SUMMARY ............................................................................................................... 4 B. PROJECT STATUS ................................................................................................. 4 C. PROPOSED CHANGES .......................................................................................... 4 D. APPRAISAL SUMMARY ....................................................................................... 7 ANNEX 1: RESULTS FRAMEWORK AND MONITORING.................................... 8 3 POWER SECTOR EFFICIENCY ENHANCEMENT PROJECT (PROMEF) RESTRUCTURING PAPER SUMMARY This restructuring package seeks your approval for a Level II restructuring of the Honduras Power Sector Efficiency Enhancement Project – PROMEF (P104034), otherwise referred to as the “Project�. The restructuring is requested to (i) assign the Project Executing Unit in the Empresa Nacional de Energia Electrica (UEP-ENEE) with the functions and responsibilities previously attributed to the Unidad Administradora de Proyectos de la Secretaría del Estado en el Despacho Presidencial (UAP-SDP), which will no longer have a role in the Project; (ii) reduce the amount of funds within each component, as a result of the cancellation of part of the credit, in accordance with the government’s request; and (iii) reduce the scope of the results framework. The fiduciary (i.e. financial management and procurement) and monitoring and evaluation responsibilities of the Project that were previously held by (UAP-SDP) are to be assigned to the (UEP-ENEE) through this restructuring. This change was requested by the Government of Honduras to reduce the administrative procedures within the Government and expedite the project execution. PROJECT STATUS The Project was approved by the Board on January 22, 2009 and the Credit Agreement was signed on February 27, 2009. Due to various delays, the recipient was not able to meet all the effectiveness conditions before its original due date, so an extension of effectiveness to June 30, 2010 was granted by the Bank following the formal request of the Government. The PDO rating has been upgraded to moderately satisfactory because project implementation has been progressing and the project team is working to finalize the bidding documents for the project's main bidding processes. The UAP-SDP and ENEE have advanced with defining the technical specifications and the preparation of the bidding documents for the project's three most important processes: a) Management Information System, b) Maintenance equipment and c) Remote metering system. The UAP-SDP and ENEE have also drafted terms of reference for eleven processes, including the three largest ones in the procurement plan and ENEE has made relevant progress in addressing the environmental issues associated with the Project. PROPOSED CHANGES • Results/indicators The proposed project restructuring will not affect the Project Development Objective. However, it will reduce the scope of the PDO results indicators and the intermediate results indicators and respective targets that are related to project components two and three. Please refer to Annex 1 for more details. 4 • Components The project will continue to consist of the same three components: (1) improving ENEE’s commercial and corporate resource management; (2) rehabilitating ENEE’s distribution regional sub-networks; and (3) strengthening ENEE’s institutional capacity and corporate governance. However, the project restructuring implies the following impact on the components: 1. Component one will remain the same. 2. Component two will be reduced by 320,000 SDR. 3. Component three will be reduced by 820,000 SDR. 4. Contingencies will be reduced by 380,000 SDR. • Institutional arrangements The UEP-ENEE was establish on September 15, 2010 through Memorandum GG 0860 by the Empresa Nacional de Energia Electrica with the responsibility of overseeing the technical aspects of the Project. Under the new institutional arrangements, the UEP-ENEE will assume all the responsibilities previously entrusted to UAP-SDP and as a result of this UAP-SDP will no longer have a role in the implementation of the Project. The Bank has carried out a capacity assessment of the UEP-ENEE, and the institutional arrangements were found to be acceptable from the technical and fiduciary perspectives. • Financing The proposed project restructuring reduces the scope of PROMEF by 1,520,000 SDR, from 20,200,000 SDR to 18,680,000 SDR as a result of the cancellation request by the Government of Honduras. 5 Project Costs (SDR) Components/Activities Current (Expressed Proposed in SDR) (Expressed in SDR) Component 1: Improving ENEE’s commercial and IDA: 10,900,000 IDA: 10,900,000 corporate resource management Component 2: Rehabilitating distribution networks IDA: 4,900,000 IDA: 4,580,000 Component 3: Strengthening ENEE‘s institutional IDA: 2,400,000 IDA: 1,580,000 capacity and corporate governance Contingencies IDA: 2,000,000 IDA: 1,620,000 * Exchange rate as of August 2, 2011 US$1.0 = SDR0.626038 • Financing Plan Approval Date Original Revised Cancelled 22-Jan-2009 20,200,000 18,680,000 1,520,000 • Disbursement arrangements According to the Borrower's request, the schedule is the following: Category Amount of the Credit Percentage of Expenditures Allocated (Expressed in to be financed SDR) (inclusive of Taxes) (1) Goods, works, consultants’ services and Non-Consultants’ Services for Part 10,900,000 100% 1 of the Project (2) Goods, works, consultants’ services and Non-Consultants’ Services for Part 4,580,000 100% 2 of the Project (3) Goods, works, consultants’ services, Non-Consultants’ Services, Training 1,580,000 100% and Operating Costs for Part 3 of the Project (4) Unallocated 1,620,000 TOTAL AMOUNT 18,680,000 • Financial management arrangements The FM team has performed a capacity assessment to UEP ENEE and confirmed that UEP-ENEE has taken adequate measures to sustainably build its Financial Management capacity. These measures are the following: (a) UEP-ENEE will hire an accountant under ToRs acceptable to the Bank to complete the staffing of their administrative Unit; (b) UEP-ENEE will carry out the implementation of SIAFI-UEPEX system, including requesting SEFIN-UDEM the transfer of the BIP code from SDP and the required training and (c) UEP-ENEE FM staff will receive additional training from the Bank in 6 FM and Disbursements, as well as receiving additional FM support during implementation startup. • Procurement The procurement capacity assessment confirmed that UEP-ENEE has taken adequate measures to sustainably build its procurement capacity. These measures are the following: (a) UEP-ENEE will hire two procurement analysts, whose experience was found reasonable by the Bank, (b) UEP-ENEE will hire a Senior Procurement Consultant acceptable to the Bank who will work under TORs acceptable to the Bank in order to coach and mentor the procurement analysts and to control the quality of UEP-ENEE procurement documents and decisions during the term of one year; and (c) UEP-ENEE and the Bank have agreed on a plan for the transference of procurement responsibilities from UAP-SDP to UEP-ENEE. This notwithstanding, UAP-SDP will continue conducting project procurement till the Senior Procurement Consultant is actually hired. The transference procurement plan will be updated and submitted to Bank approval by then and prior to the initiation of any procurement action by UEP-ENEE. Additionally, in the medium term, UEP-ENEE will enlarge its office space and complete the implementation of its digital filing system. APPRAISAL SUMMARY • Economic and financial analysis The economic benefits of this project include reduction in technical losses and improved service quality. The economic benefits included in the original quantitative analysis consist of resource savings associated with new metering equipment and loss reduction only. As a result of the reduction of component 2 in the maintenance equipment component, the physical consequence of this reduction does not affect the original scope of new metering equipment. The project is assumed to reduce technical losses by 2 percent, resulting in energy savings at peak of around 10GWh in the first year. They are valued as savings at the generation level, at peak, and at the corresponding marginal cost for energy and capacity, which is considered representative of the marginal cost from ENEE’s energy purchases from independent power producers. This is a conservative evaluation in the sense that it does not take into account distribution and transmission savings, which are implicitly considered as sunk costs. The economic results from an evaluation of the project’s costs and benefits are as follows: Project Economic Analysis. Summarv of Results for Economic Evaluation of Project Present Value of Costs $23.5 million Present Value o f Benefits $36 million Net Present Value $13.5 million IRR 18% Project Financial Analysis. The benefits arising from Component 2 and the reduction of technical losses are essentially the same as those in the economic analysis. • Technical 7 This restructure only affects to a limited extent the rehabilitation of the distribution networks the rest of the components remain the same. 8 ANNEX 1: Results Framework and Monitoring HONDURAS: POWER SECTOR EFFICIENCY ENHANCEMENT PROJECT (PROMEF) Project Development Objective (PDO): Revised Project Development Objective: D=Dropped Cumulative Target Values** C=Continue Core PDO Level Results N= New Unit of Data Source/ Responsibility for Baseline Frequency Indicators* R=Revised Measure YR 1 YR 2 YR 3 YR4 Methodology Data Collection Indicator One: C Year 2010 to 8% Increase in the Cash Recovery be improveme Index (CRI) in each of the three determined nt from regional distribution sub- by ENEE baseline networks based upon 2008 annual data. Indicator Two: C Average of Improveme Annual decrease in system the three nt on an average interruption duration month annual index (SAIDI) period basis following implementati on of the Incident Recording Management System (IRMS) in the whole company.Ba seline: 3 mo. period prior to IRMS implementati on Indicator Three: C Average of Improveme Annual decrease in system the three nt on an average interruption frequency month annual index (SAIFI) period basis following implementati on of the Incident Recording Management System (IRMS) in the whole company.Ba seline: 3mo. period prior to IRMS implementati on. Indicator Four: C 22.50 15.00 Electricity losses per year in project area (core indicator) Indicator Five: C 3 month To be Average interruption frequency period prior defined per year in the project area to IRMS once (core indicator) implementati baseline on. To be value is completed established. later on. INTERMEDIATE RESULTS 10 Intermediate Result (Component One): Revised Intermediate Result (Component One): Intermediate Result indicator 30,000 28,600 One: Improve ENEE's commercial management. R Indicator: Number of AMRs installed. Improve ENEE's commercial Systems in management.Indicator: CMS, C Systems are place and IRMS and CRMIS in place not in place satisfactorily working Improve ENEE's commercial 0 40% of total management.Indicator: Number C customers of customers in CMS and IRMS database Improve ENEE's commercial management.Indicator: Number 0 CMS: 50 or of ENEE employees trained to C as needed IRMS: 10 or use the CMS, IRMS, and as needed CRMIS CRMIS: 20 or as needed Improve ENEE's commercial management.Indicator: Number C Average of Improvement of customer claims related to the 3 month in the billing period average following semiannually implementati value on of the compared to CMS in main the previous office six month s s/whole company. Baseline data for 2008 under collection 11 Cumulative Rehabilitate distribution C 0 Yr 1:0 Yr networks.Indicator: Number of 2:250 Yr 3 transformers replaced 750 Yr 4:1000 Rehabilitate distribution 0 Cumulative networks.Indicator: Number of C Yr1: 0 Yr2: 50 Yr3: 200 PCB-containing equipment Yr4: 350 replaced Rehabilitate distribution R 0 Cumulative: networks.Indicator: Number of Yr 1:5 Yr 2: heavy vehicles acquired 10 Yr 3: 15 Yr 4: 20 Separate Separate Strengthen ENEE's institutional C Business business capacityIndicator: Setup and units do not units operation of separate business exist operational units Strengthen ENEE's institutional Distribution Distribution capacityIndicator: Setup and C and and operation of the Distribution Commerciali Commerciali zation Unit zation Unit and Commercialization unit does not operational exist. Strengthen ENEE's institutional No key staff capacityIndicator: Competitive in Key staff selection of key personnel in C distribution selected and the distribution and and in place commerciali commercialization unit (3 zation unit managers, 10 key staff) Strengthen ENEE's institutional Rate of Improvement capacityConsumer satisfaction C acceptance in the of each average 12 and perception of each average group (e.g. annual value consumers, compared to NGOs, civil the previous society year organizati on) at time of first survey. Intermediate Result indicator Two: : Intermediate Result (Component Two): Revised Intermediate Result (Component Two): Intermediate Result indicator One: Intermediate Result indicator Two: : *Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually 13 14