Document of The World Bank FOROFFICIALUSEONLY ReportNo: 47183-UG PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDCREDIT INTHE AMOUNT OF SDR49.5 MILLION(US$75 MILLIONEQUIVALENT) AND A PROPOSEDGRANT FROMTHE GLOBAL ENVIRONMENTFACILITY TRUST FUND INTHEAMOUNT OFUS$9MILLION TO THE REPUBLIC OF UGANDA FOR A N ENERGY FOR RURAL TRANSFORMATION PROJECT INSUPPORTOFTHESECONDPHASEOFTHE ENERGY FOR RURAL TRANSFORMATION PROGRAM March13,2009 Africa Energy Group SustainableDevelopment Department Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. CURRENCY EQUIVALENTS (Exchange Rate Effective February 13,2009) Currency Unit = Uganda Shillings USh1950 = US$1 US$1.51 = SDR1 FISCAL YEAR July 1 - June30 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank APL Adaptable Program Lending BADEA Banque Arabe Pour le Developpement Economique en Afrique (ArabBank for Economic Development in Africa) BOO BuildOwn-Operate BoU Bank of Uganda BST Bulk SupplyTariff CICS Community InformationCenters CSF Credit Support Facility DED Deutscher Entwicklungsdienst (German Development Service) EIS Environmental Impact Studies ERA Energy Regulatory Authority ERT (1 and 2) Energy for Rural Transformation EMDSWG Energy and MineralDevelopment Sector Working Group ESMF Environmental and Social ManagementFramework ESWG Energy Sector Working Group FIRR Financial Internal Rate of Return GEF Global Environmental Facility GoU Government of Uganda GPOBA Global Program for Output-BasedAid GTZ Deutsche Gesellschaft fir technische Zusammenarbeit (GermanAgencyfor Technical Cooperation) GVEP Global Village Energy Partnership HC Health Centers HSSP Health Sector Strategic Plan ICT Informationand Communication Technology IDA International Development Agency IFC International Finance Corporation IFRs InterimFinancial Reports IPPS IndependentPower Producers IREMP Indicative Rural Electrification Master Plan KfW KfWEntwicklungsbank (GermanDevelopment Bank) KWh Kilowatt hour LOC Letter of Credit MAAIF Ministryof Agriculture, Animal Industry andFisheries FOROFFICIAL USE ONLY M C Maintenance Contract MDIs Microfinance Depository Institutions MEMD Ministry of Energy and Mineral Development MoES Ministry of Education and Sports MoFPED Ministry o f Finance, Planning and Economic Development MoH Ministry o f Health M W Megawatt NEMA National Environmental Management Authority NMHCP National MinimumHealth Care Package NPV Net PresentValue NUSAF NorthernUganda Social Action Fund OBA Output-basedAid PCU Project Coordination Unit PEAP Poverty Eradication Action Plan PFIs Participating Financial Institutions PHC Primary HealthCare PMA Plan for Modernizationof Agriculture PPA Power PurchaseAgreement PRDP Peace Recovery and Development Plan PRG Partial Risk Guarantee PSFU Private Sector Foundation of Uganda PVTMA PV TargetedMarket Approach RAP Resettlement Action Plan RE Rural Electrification REA Rural Electrification Agency REB Rural Electrification Board REF Rural Electrification Framework ROE Returnon Equity RPF Resettlement Policy Framework SACCOs Savings and Credit Cooperative Societies SHS Solar Home System SMEs Small andMedium Enterprises SPC Special PurposeCompany SWAP Sector Wide Approach SWER Single Wire Earth Return ucc Uganda Communication Commission UECC Uganda Energy Credit Capitalization Company UETCL Uganda Electricity Transmission Company Ltd. UJAS UgandaJoint Assistance Strategy USD UnitedStates Dollar WB World Bank WENRECO West Nile Electric Company Vice President: Obiageli Ezekwesili Country Director: John McIntire Country Manager Kundhavi Kadiresan Sector Manager: S. Vijay Iyer Task Team Leader: Malcolm Cosgrove-Davies This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. UGANDA Uganda: Energyfor Rural TransformationI1 CONTENTS Page I STRATEGICCONTEXTANDRATIONALE . ................................................................. -1 A. Country and Sector Issues ................................................................................................... 1 B. Rationale for Bank and Global Environmental Facility (GEF) Involvement ...................... 1 C. Higher Level Objectives to Which the Project Contributes ................................................ 1 I1. PROJECT DESCRIPTION .............................................................................................. 2 A. Lending Instrument,Financing Arrangements and Other Approaches............................... 2 B. Program Objective and Phases ............................................................................................ 2 C . Project Development Objective and Key Indicators ........................................................... 3 D . Project Components............................................................................................................ -4 E. Lessons LearnedandReflected inthe Project Design ........................................................ 9 F. Alternatives Consideredand Reasons for Rejection ........................................................ -10 I11. IMPLEMENTATION ..................................................................................................... 10 A. PartnershipArrangements ................................................................................................. 10 B. Institutional andImplementation Arrangements ............................................................... 11 C. Monitoringand Evaluation................................................................................................ 11 D. Sustainability and Replicability ......................................................................................... 11 E. Critical Risks and PossibleControversial Aspects ............................................................ 11 F. Loadcredit Conditions and Covenants............................................................................. 13 I V . APPRAISAL SUMMARY .............................................................................................. 14 A. Economic and Financial Analyses..................................................................................... 14 B. Technical ........................................................................................................................... 17 C. Fiduciary ............................................................................................................................ 18 D. Social ................................................................................................................................. 19 E. Environment ...................................................................................................................... 19 F. SafeguardPolicies ............................................................................................................. 19 G . Policy Exceptions and Readiness...................................................................................... 21 Annex 1: Country. Sector and Program Background.................................................................... 22 Annex 2: Major RelatedProjects Financedby the Bank and/or Other Agencies ......................... 34 Annex 3: Results Framework and Monitoring .............................................................................. 36 Annex 4: Detailed Project Description.......................................................................................... 41 Annex 5: Project Costs................................................................................................................. 58 Annex 6: Implementation Arrangements ...................................................................................... 59 Supervision Plan............................................................................................................................ 60 Annex 7: Financial Managementand Disbursement Arrangements............................................. 61 Annex 8: ProcurementArrangements ........................................................................................... 77 Annex 9: Economic and Financial Analysis.................................................................................. 89 Annex 10: SafeguardPolicy Issues ............................................................................................. 106 Annex 11: Project Preparationand Supervision......................................................................... -110 Annex 12: Documents inthe Project File.................................................................................... 112 Annex 13: Statementof Loans and Credits................................................................................. 113 Annex 14: Country at a Glance ................................................................................................... 115 Annex 15: Incremental Cost Analysis ......................................................................................... 117 Annex 16: Credit Support Facility............................................................................................... 123 Annex 17: Maps........................................................................................................................... 131 List of Tables Table 1:Uganda ERT I1Financing Plan ......................................................................................... 5 Table 2: Uganda ERT I1Indicative Household Connection Targets............................................... 9 Table 3: Sector and Project Risksand MitigationMeasures......................................................... 12 Table 4: Uganda ERT Project Conditions/Covenants................................................................... 14 Table 5: Financing Plan for UgandaEnergizing Rural Transformation Program......................... 22 Table 6: Project Components - Phase I......................................................................................... 24 Table 7: Project Components (Phases I1and 111) .......................................................................... 24 Table 8: Status o f PhaseI1Triggers .............................................................................................. 28 Table 9: Uganda ERT I1Financing Plan....................................................................................... 45 Table 10: Uganda ERTI1Indicative Household Connection Targets........................................... 49 Table 11:ERT I1Financing Plan ................................................................................................... 58 Table 12: Financial ManagementRiskAssessment Matrix .......................................................... 63 Table 13: Goods to beprocured under ERTI1............................................................................. -79 Table 14:Consultanciesto beprocuredunder ERT I1.................................................................. 79 Table 15:Procurementunder ERT I1by Agency.......................................................................... 81 Table 16:Durationof Selected ProcurementProcesses ....................................................... ;........83 Table 17:UgandaRenewableEnergyPolicy Objectivesand Strategies .................................... 101 Table 18: Renewable Energy Generation: Grid Connected SupportedUnder ERT I................118 Table 19:Institutionaland CommercialPV SupportedUnderERT Iand Likely Impact ..........118 Table 20: HouseholdPV Systems Supportedunder ERT Iand Likely Impact.......................... 119 Table 21:AnticipatedResultsfrom GEF Support to ERT I1...................................................... 121 Table 22: Fundingfrom GEF and Other Sources for UgandaERT I1 ........................................ 122 Listof Figures Figure 1:IDA CumulativeDisbursements.................................................................................... 27 Figure2: GEF CumulativeDisbursements .................................................................................... 27 Figure3: Overviewo f FundsFlow: .............................................................................................. 72 Figure4: ERT I1Funds Flow Chart (Specificfor EachDesignatedAccount).............................. 73 Figure 5: GridBasedRuralElectrificationFlow of Funds ........................................................... 94 Figure6: IndependentGrids Flow o f Funds.................................................................................. 96 Figure7: RenewablePower GenerationFlow o f Funds................................................................ 98 UGANDA UGANDA:ENERGY FORRURALTRANSFORMATION APL-2 PROJECT APPRAISAL DOCUMENT AFRICA AFTEG Date: March 13,2009 Team Leader: Malcolm Cosgrove-Davies Country Director: John McIntire Sectors: General energy sector (40%); Power Sector Manager/Director: SubramaniamV. (25%); Other social services (25%); Iyer Telecommunications (10%) Project ID: P112334 Themes: Infrastructure services for private Environmental Assessment: Partial sector development (P); Other financial and Assessment private sector development (P) Lending Instrument: Adaptable Program Loan Global SupplementalID: P112340 Team Leader: Malcolm Cosgrove-Davies Lending Instrument: Adaptable Program Loan Sectors: General energy sector (40%); Power Focal Area: C-Climate change (25%); Other social services (25%); Environmental Assessment: Partial Telecommunications (10%) Assessment ' Themes: Infrastructure services for private SupplementFully Blended?: Yes sector development (P); Other financial and private sector development (P) [ 3 Loan [XI Credit [XI Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 75.00 Proposedterms: BORROWEWRECIPIENT (IDA) Global Environment Facility (GEF) 0 9.00 9.00 Total: 8.3 84.7 93.00 Borrower: Government of Uganda Kampala Uganda Responsible Agency: Ministryof Energy and Mineral Development Amber House Uganda Tel: 256 414 252 759 rugwnayo@energy.go.ug Project implementation period: Start March 31,2009 End: May 3 1,20 13 Expected effectiveness date: June 30, 2009 Expected closing date: June 30,20 13 Does the project depart from the CAS incontent or other significant respects? Re$ PAD I.C. []Yes [XINO Does the project require any exceptions from Bank policies? Re$ PAD IV.G. Have these been approved by Bank management? I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Re$ PAD IILE. [XIYes []No Does the project meet the Regional criteria for readiness for implementation? Re$ PAD I K G . [XIYes [ ] N o Project development objective Re$ PAD II.C., TechnicalAnnex 3 The objective o f the proposed project i s to increase access to energy and ICTs inrural Uganda. Global Environment objective Re$ PAD II.C., TechnicalAnnex 3 To increase the use o f renewable energy inUganda. Project descriptionRe$ PAD II.D., TechnicalAnnex 3 Component1: RuralEnergyInfrastructure(US$53.4 million; US41.0 million IDA, US$5.7 million GEF; US86.7million GOU). This component will finance extension o f the existing electricity distribution network, installation of independent distribution systems, small scale renewable energy generation plants, household and institutional solar PV systems, and related technical assistance and training. It will also capitalize the Credit Support Facility, and provide cost-shared assistanceto private sponsors seeking financial closure on rural energy investments. Component2: ICT (US$9.2 million, US$8.0million IDA; US$1.2million GoU). This component will finance internet broadband extension to rural areas, new community information centers, cell phone charging stations for existing community information centers, and computer equipmentfor schools and healthclinics. Technical assistanceand training will also be supported, including development o f information packages to rural customers. Component3: EnergyDevelopment,Cross SectoralLinks,ImpactMonitoring(US$30.4 million, US26.0million IDA; US$3.3 million GEF; US$l.1 million GoU). This component will finance solar PV energy packages for rural schools, health clinics, and water facilities, and includesrelated technical assistance, training, and operating costs. This component also supports the Project Coordination Unit, assessment ofpoverty impacts by the Ministryof Finance, Planning, and Economic Development, as well as outreachactivities by the Ministry of Local Government. Which safeguardpolicies are triggered, ifany? Ref: PAD IKF., TechnicalAnnex 10 (OP/BP 4.01) Environmental Assessment; (OP/BP 4.04) Natural Habitats; (OP/BP 4.12) Involuntary Resettlement; (OP/BP 4.11) Physical Cultural Resources; (OP/BP 4.36) Forests; (OP/BP 4.37) Safety of Dams; and (OP/BP 7.50)Projects on International Waterways Significant, non-standardconditions, if any, for: Ref: PAD III.F. Board Presentation: none Loadcredit effectiveness: Execution of Subsidiary Agreements betweenGovernment and: i)Uganda Communications Commission; ii)UgandaEnergy Capitalization Company Ltd.; and iii) Private Sector Foundation Uganda. Issuance by MEMDo f Accountability Instructions stipulating the respectiveroles and responsibilities of the participating ministries, and arrangementsfor implementation and reporting ofthe activities carried out by each of the ministries. Adoption of a Project Operational Manual satisfactory to the Association. Covenants applicable to project implementation: 0 Staffing and Operationalization of UECC, includingProduction of aUECC Operational Manual by UECC by the First disbursement for CSF Subproject support Financial andprocurement capacity assessment of UECC by IDA 0 Execution of a Participation Agreement betweenUECC and a Participating Financial Institution By February 28,2010, submission by UETCL to ERA of revised feed-intariffs for small renewableenergy power producers I. STRATEGICCONTEXTANDRATIONALE A. Country and Sector Issues 1. Rural transformation is a priority in the Government of Uganda's (GoU) Poverty Eradication Action Plan (PEAP) as well as in the National Development Plan, which i s under preparation. The PEAP depends upon infrastructure and functioning social services to promote growth and reduce poverty. Rural areas face low access to modern energy services and information communication technologies (ICTs), and hence are priority destinations for new investments. 2. In November 2001, the Bank approved the Energy for Rural Transformation (ERT) program as a three-phase Adaptable Program Loan (APL). The purpose ofthe ERT programis to developUganda's energyandICTsectors, sothatthey makeasignificantcontributionto the productivity of enterprises andthe quality of life ofhouseholds. The objectives of Phase Iwere to put inplace an environment and related capacities conducive to commercially-oriented, sustainable service delivery of ruralhenewable energy and ICTs (see Annex 1for more details). 3. Based on the experience from Phase I,ERT implementing agencies have now fully adopted their role and are ready to move to Phase 11. In general, these agencies have demonstrated a strong sense of ownership, commitment and newly created capacity for scaling up activities. The GoU has demonstrated its commitment to the project by forming an inter- agency coordinating committee, led by the Ministry of Energy and Minerals Development, to address all key conceptual and operational issues inthe design and implementation of ERT 11. B. Rationalefor BankandGlobalEnvironmentalFacility (GEF) Involvement 4. The Bank is a major strategic partner in Uganda's development, and the ERT Program, with its focus on rural transformation, is an important element ofthis partnership. The Bank has supported power sector reforms, Uganda Electricity Board restructuring, and major power investments, which will initially benefit mainly the urban areas. It is important that the Bank also support GoU's efforts inrural electrification and renewable energy development, to ensure that the Bank's support extends beyond the minority who will be served by the main grid. In addition to its direct support, the use of the Bank's convening power, to `crowd in' other donors to the sector, i s also an important contribution, especially in view of the significant additional resources neededto reach GoU's access expansion goals. 5. The Global Environmental Fund (GEF) portion of this project is part of the GEF Strategic Partnership, which is similar in approach to a Bank APL. As in the case for the triggers for the World Bank credit, after some delays inimplementation, GEF triggers have also beenmet (Annex 1). C. HigherLevel Objectivesto Which the ProjectContributes 6. The proposed ERT I1 is fully consistent with the current Uganda Joint Assistance Strategy (UJAS), and is listed as a proposed operation in 2008 (p. 91). The UJAS states that: "Investments in power generation facilities will increase the reliability and lower the cost of electricity, which is a major cost to business according to the 2004 investment climate assessment. A rural energy program, with the support of the Global Environmental Facility, 1 will harness local entrepreneurial capacity inexpanding access o f rural communities to modem energy sources, including renewable energy. Projects to build ministerial capacity, promote private sector involvement, and strengthen energy sector institutions will seek to create an efficient, commercially-viable energy sector." (p. 24). 7. The GoU remains firmly committed to infrastructure provision as a key element of its rural development strategy. Hence, the APL's higher level objective o f rural area transformation is retained in this project because it i s as relevant now as it was when the program was first designed. The enhanced focus in this project on Northern Uganda also contributes directly to the GoU peace and reconciliation strategy for that region. 8. The GEF's higher level objective o f mitigating Uganda's greenhouse gas emissions is also retained. This i s now even more relevant than when the program was first designed, given global concerns about greenhouse gas emissions. 11. PROJECT DESCRIPTION A. LendingInstrument,FinancingArrangementsand Other Approaches 9. The World Bank lending instrument i s an Adaptable Program Loan, and the GEF instrument i s a grant as part o f the GEF-World Bank Strategic Partnership. B. ProgramObjectiveand Phases 10. The purpose o f the ERT program is to develop Uganda's energy and ICT sectors to facilitate a significant improvement in the productivity o f enterprises and the quality o f life o f households. 11. The APL, originally planned for ten years, is now expected to last 15 years,' and is divided into three phases. The objective o f the first phase was to put in place an environment and capacity conducive to commercially-oriented, sustainable service delivery o f ruralhenewable energy and ICTs. Limitedinvestmentswere made inthe energy sector, treating each sub-project on a case-by-case basis, to test (and refine, as necessary) and prove the readiness o f business models and associated support systems for commercially-oriented rural electrification and for meeting essential community needs, to prepare for scaled-up delivery in subsequent phases. For the ICT sector, the main activities were to support the GoU's program for accelerated rural access to basic telephone service and the spread of Internet to district capitals, with a few pilot telecenters inremote rural areas. 12. The proposed project retains the original focus and scope, with operational adjustments based on the implementation experience in the first phase, and on sectoral and national developments. The second phase will accelerate investmentsand increase regional coverage by shifting from the case-by-case Phase I approach to processing sub-projects through the institutional framework. The institutional framework will be amended or strengthened as necessary. 13. The third phase will shift the focus to rapid growth in investments so as to reach the GoU's long-term targets for rural electrification and renewable energy development. While ' The first phaserequiredsevenyears, andthe second andthudphasesare eachexpectedto take four years. 2 capacity building would continue, it would shift from fresh initiation to consolidation o f the outcomes o f the first and second phase activities. 14. When the three-phase ERT program was designed, the IDA funds for ERT I1 were estimated at US$45 million. However, GoU has requested additional IDA funds, mainly due to the absence o f adequate private interest and funds for rural electrification. Overall IDA financing has thus been increased to US$75 million. The cumulative total IDA commitment for ERT I(US$49.15 million) and ERT I1 (US$75 million) remains within the original APL program amount o f $165.15 million. However inview o f Uganda's low electrification rate and limitedavailability o f public funds, thereremains a need to attract additional funds from donors and the private sector. Several donors have expressed an interest in cofinancing, and a detailed agreement has been reached with the German development agencies GTZ and DED. Umeme- the main Ugandan electricity distribution company-is also in discussion with IFC for support on an extension project which could add about 60,000 new connections. Moreover, Arab donors-Arab Bank for Economic Development in Africa (BADEA) and the Saudi Fund for Development-have indicated a willingness to cofinancing o f about US$20 million if so requested. Cofinancing o f approximately US$5 million i s also being sought from a proposed Trust Fund to Support Energy Small and Medium Size Enterprises in Sub-Saharan Africa.2 These additional funds will complement the ERT I1activities, allowing the Rural Electrification Agency (REA) to substantially scale-up its access targets. C. ProjectDevelopmentObjectiveand Key Indicators 15. The objective o f the proposed project i s to increase access to energy and ICTs in rural Uganda. 16. The key performance indicators for the ten-year program are listed below, with indicators related to GEF-supported activities shown initalics: Number o f homes, enterprises, public institutions (health clinics, schools, water supply facilities), trading centers, and communities with increased access to modern energy/ICTs; Number o f people benefiting from improved delivery of health, education, and water services; Employment/economic gain due to small and medium enterprise (SME) participation inthe project; Sales of solar photovoltaic (Pv) household and institutional systems; Price reduction in solar PVproduct market, improvement in product, and increase in the range ofproduct availability; Increase in the power generatedfrom renewable energy sources (excluding large scale hydroelectricity); and Increase in local capacityfor renewable energy development. * ThisTrust Fundis beingestablishedby the World Bank Africa Energy Unit in collaborationwith the Global Village EnergyPartnership(GVEP). 3 17. The key performance indicators (Annex 3) for the proposed Phase I1o f the project are listed below, with indicators related to GEF-supported activities shown initalics: a) Increased access to energy, as measured by the percentage o f rural population with access to electricity inproject areas (rural electrification rate); b) Increased Access to ICT Services, as measured by the percentage o f the geographical area with access to modern ICT services; c) Megawatts of additional power generationJFom renewable sources; and d) Tons of COz emissionsreducedavoided as a result of theproject. 18. The triggers for moving to Phase I11are similar to the Phase 11, but are at a higher level o f development (GEF related triggers are shown initalics): a) Satisfactory achievement o fPhaseI1connection targets (129,000); b) Fully operational regulatory system, Rural Electrification Fund, wheeling system and procedures; c) Successful implementation and/or functioning o f main grid rural extensification and independent grid systems; d) Construction of additional renewable energy power generation facilities in the range of 20-25 MW, with a GEF share in total cost of about 15-20percent,and the rest of thefinancing to comeJFoma combination of Bank and commercialfinancing, with about I O MW supported byfinancing sources other than the GEF; and e) Sales of solar PV systems of 1.0 million Watts-peakbeyond those installed in ERT I, with a GEF share in total cost of about 15-20percent, and the rest of thefinancing to comefrom a combination of Bank and commercialfinancing. D. ProjectComponents 19. The proposed project design and allocation of funds respond to the implementation experience in Phase Ias well as overall changes in Uganda's economy, and the power and ICT sectors (see Annex 4 for details). Components 20. Based on the implementation experience of ERT I,the six components o f the first phase have been consolidated into three components for ERT I1(Table 1). 4 Table 1: Uganda ERT I1Financing Plan I D A GEF GoU TOTAL Project Cost By Component and/or Activity 1.1 Publicly Funded GridRelated Power Supply 26.6 6.7 33.3 1.2 Off-Grid RenewableEnergy Investments 7.4 2.2 9.6 1.3 Technical Assistance, Training 1.5 1.5 1.4 Credit Support Facility 3.5 3.3 6.8 1.5 Private Sector Foundation Uganda 2.0 0.2 2.2 2. InformationCommunications Technologies (ICT) 8.0 0.0 1.2 9.2 2.1 Investments 7.4 1.1 8.5 2.2 Technical Assistance, Training 0.6 0.1 0.7 3. Energy Development, Cross Sectoral Links,Impact Monitoring 26.0 3.3 1.1 30.4 3.1 Energy Packages for Health, Water, Education 20.0 2.1 1.1 23.2 3.2 Technical Assistance, Training, Operating Costs 6.0 1.2 7.2 Total 75.0 9.0 9.0 93.0 *Note: Parallelfinance from the private sector and other donorsis not includedinthis financingplan. Component 1: Rural Energy Infrastructure: (US$53.4 million-US$4 1.O million IDA, US$5.75 million GEF; US$6.7 million GoU) 21. Publicly Funded Grid-related Power Supply. The bulk of the IDA funds under this subcomponent will be usedto finance REA-sponsored main grid distribution extension to rural areas. These will include investments which were commenced under ERT I,but were not completedby ERT Iclosure. Main grid renewableenergy power generation will be financed by the private sector, which may access IDA or GEF funds via the Credit Support Facility (Annex 16). 22. InPhase I,REA was successful in financing new distribution access projects under an arrangement in which REA constructed, with GoU ownership, projects that met agreed criteria of economic and financial viability. These projects were concessioned to the private sector under a management contract that includes provisions for new expansion through private debuequity. This approachwill be followed inERT I1until the private sector is ready to step in with more substantial debt/equity participation inthe initial investment. Overall, about 109,000 new connectionsare expectedthrough extension of the main grid. 23. During ERT I,GoU developed its Renewable 'Energy Policy, which provides the institutional framework for grid-connected renewableenergy power generation. Further, inERT I,therewassignificantprivatesectorinterestinthissegment.Theinvestmentsarelikelytobe in sugar mill cogeneration, following the success of the Kakira project in ERT I,and small hydro. Overall, this component i s likely to lead to 30 M W of renewable energy power generationcapacity inERT 11. 5 24. Off-gridRenewableEnergyInvestments. This component includes both solar PV for household and institutional consumers as well as independent grid systems. With regard to solar PV, the focus o f ERT Iwas on institutional sales to rural health, education and water facilities, with limited household sales. Duringthe course of ERT I,the Photovoltaic Targeted Market Approach (PVTMA) approach was added to facilitate household sales. The proposed project wilI use a combination o f IDA and GEF funds to co-finance sales to households and non-government institutions, Apart from subsidies, the P V T M A approach includes consumer finance for household sales, with the commercial risk taken by the lender. Overall, about 20,000 households are expected to receive solar PV service. 25, Independentgrids have also experienced difficulties inattracting adequate private sector interest. Where the private sector has come forward, there have been significant delays in reaching financial closure as well as implementation, and also a need for a high level o f subsidies. Thus, here also REA intends to follow the same approach as for grid-based rural electrification, with about 2,000 consumers expected to be connected through independent grids. 26. TechnicalAssistance and Training. This component includes support to REA, largely for engineering, procurement, and safeguard support in preparation o f main grid and independent grid bid packages. Additional consultancy services for PVTMA activities are also included, as well as support aimed at encouraging the participation o f financial institutions in the project. 27. Credit Support Facility. To facilitate access to local commercial finance, GoU will operationalize the Uganda Energy Credit Capitalization Company Ltd. (UECC), which was set up under ERT Ibut has not yet started functioning. The UECC will provide credit enhancement products+ollectively referred to as the Credit Support Facility-aimed at encouraging the participation o f local financial institutions. These will include a standby liquidity option that effectively extends the loan tenor to more closely match the needs o f private investors. Also included will be a partial risk guarantee to address the perceived start-up risks o f mini-hydro and other eligible investments. UECC will also operate a refinance facility similar to the ERT I facility aimed at supporting solar PV transactions. Specifically, this component includes capitalization o f the UECC as well as technical assistance for its operationalization. Technical assistance also will include targeted support to potential project sponsors where appropriate and to participating financial institutions for appraisal o f investment projects. (Annex 16). 28. Private Sector Foundation Uganda (PSFU). The PSFU will support private sector investors in reaching financial closure or meeting other specific market enhancement targets through the provision o f targeted technical assistance. PSFU will continue to use the Business Uganda Development Service (BUDSERT) approach from ERT I.However, in ERT I1it will focus its efforts much more narrowly on meeting agreed targets for renewable energy power generation and solar P V sales. These include demonstrable support for financial closure of 10 MW o f renewable energy power generation, and enhancement o f rural presence o f solar companies through establishment o f about 20 new rural solar PV sales outlets. PSFU will receive operational support and also provide capacity building and training for institutions supporting rural electrification business. 6 Component2: ICT (US$9.2 million-US$8.0 million IDA; US$1.2 million GoU) 29. Investments:Investment support in ERT I1will extend the successful efforts of ERT I. The investments to be financed are: (i)last mile Internet broadband access extension to rural areas in at least 16 sub counties, with a focus on the Northern region; (ii)at least 550 new community information centers (CICs), including cell-phone charging facilities, for underservedrural areas; (iii) cell-phone charging facilities for CICs installed in ERT I;and (iv) equipment for computer labs to schools, health facilities and subsidized Internet access centres including provision for equipment maintenance. 30. Technical Assistance and Training: This component will also include support for development and dissemination o f tailor-made electronic information packages in local languages for traders, teachers, health workers, and farmers. Technical assistance to UCC for implementation, program design, information dissemination, training, and monitoring and evaluation i s also included. Component3: Energy Development,Cross SectoralLinks,Impact Monitoring(US$30.4 million-US$26.0 million IDA; US$3.3 million GEF; US$l.1 million GoU) 31. Energy Packages. This component will finance solar PV energy packages for remote health, education, and water facilities, building on the experience in ERT I.This will include completion o f the education energy package which was partially funded under ERT I.Given that the implementation rate o f the cross-sectoral agencies varied significantly in ERT I,each sector will be provided with a base allocation o f funds, with additional funds in an unallocated pool from which sectors with a faster implementation rate can draw without a need to reallocate funds. The health and water sectors performed well in ERT I,and their plans are to extend the same approach to other areas. The education sector got a late start with procuring energy packages for rural schools. The procurement process has now started, and it i s anticipated that implementationwill be at least 80 percent complete inERT I. 32. Technical Assistance, Training, and Operating Costs. This component includes engineering, procurement, safeguard, and implementation support as well as training, capacity building, and operating costs to the cross sectoral ministries above, as well as support to the ministries o f Energy and Mineral Development (MEMD), Finance, Planning and Economic Development (MoFPED), Local Government (MoLG), and Agriculture, Animal Industriesand Fisheries (MAAIF). Specific support to MEMD includes technical assistance, training, and operating costs toward continuation and expansion o f energy efficiency initiatives that were supported under ERT I.These will be coordinated with activities supportedthrough the Power Sector Development Operation as well as by other donors, such as GTZ. MEMD i s currently finalizing an Energy Efficiency Strategy for Uganda, with assistance from GTZ. Once the institutional framework for energy efficiency is ready, the next phase (ERT 111) i s expected to finance some o f the energy efficiency investments. MEMD will also evaluate the ERT I experience with gasification and may seek to access the pooled funds for further development under ERT 11. Incremental development o f the renewable energy database will also be supported, including preparation of a national survey o f micro and mini-hydro sites. MEMD will undertake a capacity buildingneeds assessment, following which specific strategic capacity building initiatives will be supported. It will also undertake HIV/AIDS awareness consistent with MEMD's broader policy. These programs promote improved health practices for the 7 MEMD workforce in general, and for the employees working on the ERT I1 project in particular. 33. MoFPED will receive technical assistance and operating costs to continue the assessment o f poverty impacts o f the rural electrification program, focusing on a continuation and deepening o f ERT Iactivity. The objective i s to identify specific monitorable indicators which can be used to effectively track rural electrification impact. Such indicators should also allow program modifications to enhance the impact o f investments. M o L G will build on its ERT I sensitization activities by focusing on output oriented goals for local government and local private sector uptake in electricity and ICT usage. MAAIF will collaborate with REA and the Uganda Communications Commission (UCC) on enhancing the connection and productive utilization o f electricity and ICT by agricultural enterprises. 34. Support to the Project Coordination Unit (PCU), which will work with the cross-sectoral ministries, is included under this component. This will include strengthening the unit through enhanced staffing, management, and reporting arrangements. RetroactiveFinancing 35. The GoU has proceeded quickly with ERT I1 project activities, and expects to begin disbursement prior to project signing. Retroactive finance will be available for eligible project expenditures which are incurred on or after January 1,2009. Retroactive financing will be up to US$7.5 million IDA funds, with no retroactive financing for GEF funds. Northern Uganda 36. Northern Uganda is a new focus in ERT 11, reflecting the significant improvements in peace and security that have taken place since mid-2006. This focus would be coordinated with the World Bank-financed Northern Uganda Social Action Fund (NUSAF) project, which aims to improve incomes o f beneficiary households and access to basic socio economic services, with ERT I1focused on the technical and hardware aspects. Total Connection Targets 37. The total number o f new connections anticipated by REA during the ERT I1 implementation period3 is 129,000 (Table 2) o f which approximately 72,000 would be supported by the ERT I1 project (52,000 grid and mini-grid plus 20,000 solar PV). This i s comprised of: (a) Connections from initial electrification, which will include a connection (Stage 1) subsidy aimedat attracting a critical masso finitial customers to support the financial viability o fthe investment; (b) Connections arising from a larger infill (Stage 11) subsidy aimed at connecting poorer households, using the output-based aid (OBA) approach outlined above; and (c) Solar PV installations, including household and institutional. Notethat a four-year project implementationperiodis planned, butthis will extend into portions of 2009 and 2013, hence the five year time frame given here. 8 Table 2: Uganda ERT I1Indicative HouseholdConnectionTargets Initial Infill (Stage 1 (Stage 2 Subsidy) Subsidy) Solar PV Total CY2009 1,000 3,000 1,000 5,000 CY2010 7,000 25,000 4,000 36,000 CY2011 8,000 25,000 6,000 39,000 CY2012 8,000 25,000 7,000 40,000 CY2013 2,000 5,000 2,000 9,000 Total 26.000 83.000 20.000 129.000 E. Lessons Learned and Reflectedin the Project Design 38. There were significant implementation delays in ERT I,partly due to the introduction o f a new institutional framework, and partly due to procurement delays. Both o f these concerns have eased considerably as the various implementing agencies became more familiar with their roles. During the implementation o f ERT I,a PCU was introduced to improve overall implementation. This PCU will be strengthenedin ERT 11. Also, advance activities are already underway for key ERT I1procurements. Specifically, using Bridge Finance, REA and the cross sectoral ministries are now procuring consultants to assist with final design and procurement packages. 39. The original ERT design assumed that as long as GoU provided the enabling environment, the private sector would invest in rural electrification and small-scale renewable energy projects. While there was adequate private sector interest in renewable energy, this was not the case for rural electrification. It i s therefore essential that public financing be available for rural electrification until there is adequate private sector interest. In addition, poor households find the capital costs associated with obtaining a connection to be a significant barrier. In response, ERT I1 provides for public financing while also seeking to expand the private sector role. Household connections will also be subsidized on an OBA basis. 40. Household sales o f solar PV systems require their own institutional framework, including consumer credit. In response, ERT I1will build on the Targeted Market Approach introduced duringERT I. 41. Liquidity risks addressed inERT Ipose an obstacle for local lenders to extend long term finance to the sector. As such, a refinance product i s requiredto facilitate access. In addition, perceived credit risks also discourage local lendingand so a partial credit or risk guarantee will increase the ability of the local financial sector to lend to energy projects, especially on a stand- alone project basis. The Credit Support Facility addresses these issues. 9 42. ERT I1 also incorporates lessons from the Private Power Generation (Bujagali) Project which was the subject of a World Bank Inspection Panel investigation that concluded in2008.4 ERT I1 incorporates elements that are fully consistent with the Bujagali Inspection Panel Management Response, and infact address some of the concerns raised by the Inspection Panel. These include: i)the provision of electricity to rural populations; ii)support for small and medium scale renewable energy investments; and iii)support for solar PV investments to provide power for remote rural households and institutions. On December 4, 2008, the Board accepted management's Action Plan to address concerns raised by the Panel. The agreed actions are advancing well, and managementwill provide a progress report to the Board inJune 2009. 43. The design of the ICT component of ERT I1also incorporate the following lessons from the implementation of ERT I: a) A dedicated unit in the Implementing Agency improved the efficiency and effectivenessofprojectmanagement; b) Baselinestudies priorto project implementationprovedto beuseful; c) Legal mechanisms, e.g., contracts and performance bonds, are useful to enhance private sector ownershipandperformance; d) Effective forward planning is essential in order to minimize procurement delays; and e) Capacity building and training are key for successful project implementation. F. AlternativesConsideredandReasonsfor Rejection 44. The only major alternative considered was to stop ERT 11, and to design a new scheme for increasing rural access to electricity and ICTs. In view of GoU's clear commitment to the ERTscheme, andthe fact that the triggers hadbeenmet, it was decidedto proceedto ERT 11. 111. IMPLEMENTATION A. PartnershipArrangements 45. Several donors have expressedan interest in complementary financing, including AfDB, Norway, Germany and Japan. The project team has held preliminary discussions with the German cooperation agencies DED, GTZ and KfW, which have indicated a very strong interest inassistingthe Phase I1inNorthern Uganda.Agreement has beenreachedwith GTZ and DED, and discussions are inan advanced stage with KfW. 4 InApril 2007, the NationalAssociation of ProfessionalEnvironmentalistsand other NGOs submitted a request to the Inspection Panel, claiming that the potential environmental and social impacts (hydrology and climate change; aquatic ecology and fisheries; and protected reserves) of the Bujagali Hydropower Project were not adequately addressed by the Bank and the GoU. The Panel produced a report which included findings of compliance and non-compliance with Bank policy provisions. Both the Panel's report and the Management Report and Recommendations are available on the Inspection Panel website http://web.worldbank.org/WBSITE/EXTERNAL/EXTINSPECTIONPANEL/O,,contentMDK:21247695-pagePK :64129751-piPK:64 128378-theSitePK:3 80794,OO.html 10 46. The project will be fully coordinated with the Energy Sector Wide Approach (SWAP), which i s currently under development. Additional financing sources are also being explored, including the Global Partnership on Output-based Aid (GPOBA), and a proposed Trust Fundto Support Energy Small and Medium Size Enterprises in Sub-Saharan Africa. Government and the Task Team will continue to explore complementary financing throughout ERT. B. Institutionaland ImplementationArrangements 47. There are no major differences from the implementation arrangements in ERT I,except that the PCU has been strengthened. The PCU is not a Project Implementation Unit because the implementation responsibility still lies with each o f the agencies that the PCU will deal with, for example the ministrieso f Health, Education, and Water. C. Monitoringand Evaluation 48. The monitoring and evaluation system will be the same as in ERT I.The PCU will continue to have the primary responsibility for tracking the project's key performance indicators, using data from the agencies and other project stakeholders. The Poverty Monitoring Unit o f the Ministry o f Finance had a major role in assessing the overall poverty impact of the rural electrification schemes during ERT I.Recently, GoU created a Budget Monitoring and Accountability Unit, .which focuses on infrastructure (energy, roads), social services (health, education, water), agriculture, and industrialization. This new unit i s well- positioned to lead monitoring and evaluation, while the PCU continues to track key performance indicators. D. Sustainability and Replicability 49. The sustainability o f the investments i s indicated by the continuing functioning o f the projects supported inERT I.While there have been implementation delays, there are no reports o f significant technical failures in any o f the supported investments. However, there are indications that the initial subsidy requirements for off-grid electrification may have been underestimated. The lessons learned from this have been taken into account in ERT 11. Further, all o f the associated implementing GoU agencies have shown strong interest in continuing their participation, including the ministries o f Education and Agriculture, which had relatively more difficulty duringERT Iimplementation. 50. The replicability o f the investments in ERT Iis clear from the proposed plans o f the various GoU implementing agencies, which will continue their approach o f ERT I,with due changes as indicated above. Inshort, the institutional framework for promoting rural access and renewable energy development is in place, with some fine-tuning needed during the course o f ERT11. E. CriticalRisks and PossibleControversialAspects 51. While the risk levels were high in ERT I,given the novelty o f the design, the ERT approach has now been internalized by GoU agencies, and the project does not entail major critical risks. The most important risks are external. The potential risks and possible controversial aspects are discussed below. 11 Table 3: Sector and Project Risks and Mitigation Measures PDO Level Risks Descriptionof risk Ratinga Mitigation measures Ratinga of risk of residual risk Supply/ Inadequatesupply to meet S Governmenthas taken decisive action to install M DemandGap electricitydemand leadsto new generation capacity. Inthe immediate continued loadshedding. This term, Governmenthas installed 150MW of results in: increasedfrustration thermal generation capacity. Inthe medium with the sector both in civil term, the 250 MW Bujagalipower station is society and at the political level scheduled for commissioningin 2011. (decreasingsectoral stability); Government is also pursuingplans for reductioninprivate sector additionalhydropowerplants ( e g Karuma) as interest;maintenanceof high well as regionalinterconnectionsand a thermal cost generation alternatives power station fueled with domestically (producing an upwardpressure producedheavy fuel oil. on prices). Political Political pressureto directnew M REA has establishedan IndicativeRural L Pressure electricityconnections toward ElectrificationMaster Planwhich provides a financially unviableareas could prioritized guidelinefor extendingaccess. An compromise financial stability of Energy Sector Working Group has been the rural electrificationprogram establishedand a sector investmentplanis beingprepared,bothof which will enhance the accountabilityof REA and other relevant agencies to proceedas planned. Specific investments supportedby ERT I1will be subject to IDA no-objection. Sectoral oversight will be enhanced through regular briefsto the NaturalResources Committee of Parliament. Sector Perceivedhigh costs and limited M Awarenessraisingon the role of privatesector L Reforms service create mountingpressure in filling the technical and financing gap faced to reduceprivatesector role, by the sector, and ensuringthat transparent and resultingin a reversalof sector effectivepower purchase agreements are put in reforms and possible exit of place to encourage private sector participation. existingprivate sector actors. Sector Political economy asserts M Strengtheningthe capacity of the regulator L Regulator dominanceover regulatory through continued support under ERT 11. functions, diminishing independenceofregulatorand eroding confidence ofprivate sector. Component Level Risks TechnicaV Lack ofplanning,design, and M The RuralElectrification Agency is now design implementationexperience operational with staff with the requisite L with low cost grid reticulation technical skills. To support the existing staffin technologies results in a adopting the low cost grid technologies, ERT I1 higher unit cost of grid includestechnical assistance for the design and expansion, unduly limitingthe implementation. The designs for grid scope andpace of access extensionswill also be subject to IDA no- expansion. objection. Implementation Weak implementation S Capacity enhancement for implementing M 12 capacity and capacity results in slow entitiesis an integralpart ofthe project. The sustainability implementation, undermining PCUwill pay special attention to the program's scale-up implementationprogressand will provide aspirations, implementationsupport to weaker institutions as needed. Lack of long-term The grid-relatedinvestmentswill be operated maintenanceresults in poor and maintainedby privatesector operators sustainability o f investments, under agreed performancetargets includedin reversing gains madeby the the O&M contracts. The performance ofthe program, operatorswill be monitoredand supervisedby the regulator under their license obligations. The maintenancesupport for MoH Solar PV systems (five-year plan) is built into the procurementcontracts for solar PVs to ensure sustainabilityinthe mid-term. Similar arrangementsare beingdevelopedin other sectors. Insome instancesfunds may S Implementationof measures identified inthe M management be inadequately accountedfor fiduciary assessment. Improvementsin usage or misusedor may notreach guidelines and monitoring. the intendedbeneficiaries. Weak procurement capacity S Procurement capacity enhancement is an M results in slow and/or importantTA element of the project and will be mismanagedimplementation. offeredthroughout the projectto ensure adequate procurement capacity at program level. Weak safeguardoversight M A ResettlementPolicy Framework and L environmental leadsto unintended Environmentaland Social Management safeguards environmental damage and/or Framework have been prepared. The project negative social outcomes will finance the hiring of specialist staff to oversee the program. Internationalrecessionreduces S Partialgrants and other concessional S Participation privatesector interest in arrangementswill be offeredto encourage participationand diminishes private sector participation. available debt & equity. Overall Risk (includingReputationalRisks)The overalland risk ofthe operation is rated as Moderate M magnitudeof Dotentialadverse imDact. F. LoanICreditConditionsand Covenants 52. The following table shows the significant non-standard conditions and covenants for ERT T I and the responsible parties to meet them. 13 Table 4: Uganda ERT ProjectConditionslCovenants Agreements for IDA and GEF Execution o f a GoUAJECC Subsidiary MoFPEDAJECC Agreement for IDA and GEF Execution o f a GoUAJCC Subsidiary MoFPEDAJCC Agreement Issuance o f accountability instructions from MEMD/ MEMDto the participating ministriesaccessing Participating designated account funds Ministries Adoption o f a project operational manual PCU/MEMD Staffing and operationalization o f UECC Prior to first Productiono f a UECC/CSF Operational manual disbursementfor L Financial and procurement capacity assessment CSF subproject o f UECC Signingo f a Participation Agreement Submissionto ERA o f revised feed-intariffs for February28,2010 UETCL small renewable energy power producers IV. APPRAISAL SUMMARY A. Economicand FinancialAnalyses 53, Both revenue-producing and non revenue-producing activities are financed by this project. The main revenue-earning activities are financed through Component 1 and would include: (i)grid-based rural electrification schemes, (ii)independent grids based on diesel or mini-hydro generation (mini-grids),and (iii) grid connected renewable energy power generation (mini-hydro or cogeneration plants). The other activities are largely non revenue-producing. 54. The economic benefits of the non revenue-producing activities, such as providing basic electricity services to rural health and education facilities, are significant. Because these activities are a small part o f the project costs and their benefits are well-established, no economic or financial analysis is required for them. 55. Several potential projects inthe revenue-producingcategories have beenidentifiedby the Indicative Rural Electrification Master Plan Study (IREMP), which was financed under ERT I. The purpose o f preparing the IREMP was to develop a framework that would be used by the REA to select and prioritize investments in the future. Similarly, the Renewable Energy Policy provides the framework for renewable energy investments. 56. The major investment activities supported by this project underline the "framework" character o f this APL. Thus, the economic and financial analysis presented below appraises the mechanism that will be used to screen the investments to be undertaken to ensure that they are economically and financially justified. 14 EconomicAnalysis 57. An economic analysis is required for all revenue-generating projects identified above. This analysis would be based on the World Bank guidelines for economic analysis o f investment projects. It i s expected that the investmentshave a projected economic internal rate o f return o f at least 10 percent, and that there would be a strong justification for exceptions to this requirement. 58. The project will require that REA demonstrates that grid extension and off-grid electrification projects financed under ERT I1are inaccordance with the IREMP. The IREMP is a combination o f a traditional electrification master plan utilized by national utilities for network investments and a promotion tool for a newly developed rural energy agency to inform and attract private sector investments, based on commercial and subsidy financing. The IREMP has been developed to reflect various alternatives o f future network extensions, taking into account any planning for future transmission lines, sub-stations and distribution networks, industrial projects and international power exchange projects. The IREMP outlines guidelines, describes preferred standards and the phased implementation o f future rural electrification in Uganda, as well as giving estimations o f costs. 59. IREMP prioritizes gridprojects based on the following techno-economic criteria: a) Inprinciple, lines implyingthe lowest marginalcost (tariff) should be constructed first; b) Where one line depends on another (i.e. a predecessor line has to be builtbefore this line can be energized), the line is demoted in the sequence until such point that it together with itspredecessorcancompete (on atariffbasis); and c) When the cumulative load o f additional lines requires up-streamnetwork strengthening, all lines already prioritized share inthe cost of such strengthening (since all contribute to the peak demand). 60. For off-grid uroiects, the IREMP requires that they be located in regions with high income levels and affordability, reasonable consumer density, significant social service and income generation potential. In the absence o f detailed field data, the IREMP suggests the following criteria: (i)tariff is the primary prioritization criterion; and (ii) benefit points i s the secondary prioritization criterion. 61, For grid-connected renewable energy Dower generation, the projects should follow the Renewable Energy Policy's Power Generation Program. This program will support public and private sector investments in large hydropower schemes and one for small power schemes. Only small power schemes (limited to 20 MW installed capacity per plant) are relevant for ERT 11. 62. For ERT I1 funded schemes, basic studies o f the various resources and sites will be carried out, followed by promotion and tendering to the private sector, which will be responsible for their implementation. This will cover mini hydropower schemes, biomass cogeneration, wind power, peat, geothermal and solar thermal electric. These projects will earn revenues based on a negotiated tariff. The operator o f the power station will enter into a Power Purchase Agreement (PPA) with UETCL, the Ugandan single buyer company. Those projects would use the template o f a standardized PPA that GoU recently developed within its Renewable Energy 15 Policy. This standard PPA foresees the payment o f a single energy charge based on the "pay-as- use" principle. GoUhas agreed to update the feed-in tariffs under the PPA by February 2,201 0. FinancialAnalysis 63. The project will require REA to present a financial analysis that meets the requirements presented below. REA, on behalf o f GoU, will submit to IDA a comprehensive financial feasibility report for each investment scheme that will involve proceeds from this project. The submission o f such a report will become due when REA requests the Bank's "No Objection" on the procurement ofthe proposed investments. 64. Itis currently foreseen that REA will have to submitthose reports on a prior reviewbasis for at least the first and second projects in each investment scheme. Depending on the outcomes o f those initial due diligence processes, the Bank will consider changing this requirement to a post review mechanism at a later stage. Project levelanalysis: 65. It is important to note that this project-level financial analysis will not take into account the capital cost subsidy funded by REA inthe form o f the grid infrastructureprocured by REA and concessioned to the private sector investor. Only investmentsfunded by the private investor will have to be reflected inthe financial feasibility study. 66. The private grid operating company bears the main commercial risk in all three investment schemes since it i s responsible for the revenue generation o f the project (through commercialization o f the distributed power) and collection o f the bills from the end consumers. The technical and commercial experience o f the private investor therefore becomes crucial to ensure that the private investor i s able to manage those commercial risks most efficiently and i s able to ensure the financial sustainability o f its operation. The financial feasibility study therefore has to include an assessment o f the private investor's technical and commercial expertise to carry out such investment schemes. 67. The other important factor in the assessment o f the financial feasibility o f the different investment schemes i s the adequate supply o f financial resources in form of equity and debt to the grid-operating entity at the beginning o f the operation. A reputable commercial bank or a financier o f the investor company will have to demonstrate the creditworthiness o f the investor and its capacity to raise the financial resources required for the implementation o f the project. 68. Therefore at the project level the financial analysis will present the valuation o f financial benefits and costs o f the project in form o f a discounted cash-flow analysis. The financial viability o f each investment scheme will be determined from the "all capital" viewpoint. This means that the analysis looks at the discounted returns to all real investment flows (except for the REA capital subsidy) for the project as a whole, irrespective of whether these come from equity or from loans. Under this approach a project will be financially sustainable when the net present value is greater than zero using the Weighted Average Cost o f Capital (WACC) o f the investor as the discountrate. 69. For analysis purposes only, the calculation o f the applicable WACC will assume a debt to equity ratio o f 75:25. The cost of equity in each scheme will be determined by the return on equity (ROE) ratio. It is currently assumed that REA in each scheme will select the private 16 concessionaire through a competitive biddingprocess and one o f the main selection criteria will be the lowest ROE proposal. It is expected that the ROE will be fixed during,the entire time of the concession, thus putting a cap on this cost item. To ensure the robustness of the project's financial projections the financial feasibility study will include a sensitivity analysis on key risks affecting the financial performance, including changes inprojected costs and revenues. Analysis of proposedsubsidy levels and their sustainability: 70. The experience under ERT I has shown that the provision of transmission and distribution assets in grid extension schemes and the provision o f generating assets in independent grid rural areas are ordinarily not commercially feasible for the private sector without subsidy assistance. This is mainly due to: (i) significant project development costs that are proportionately high given the relatively small project sizes; and (ii)affordability constraints that limit the amount o f revenue inflows to cover the investment costs. 71. Based,onthis previous experience it i s currently anticipated that only a proportion o f the investment cost related to grid extension schemes and independent grid projects could be supported on a commercial basis, and the balance o f the full investment cost not supported commercially has to be subsidized (often described as capital buy-down) from the public sector. 72. Under ERT 11, REA proposes to support those different investment schemes by procuring and financing the transmission and distribution infrastructure, while leaving the commercially fundable investment costs to the private sector investors (the former i s the REA capital subsidy). To further mitigate affordability issues, REA will intervene at the end-consumer level with targeted connection cost subsidies as outlined above. 73. Because subsidies are required for the implementation o f those schemes, the financial feasibility study must identify the total financial contributions by REA and GoU made on a subsidy level to the respective investment schemes. In a second step, the financial feasibility study would have to justify the amount o f subsidies based on REA'Sassumptions on tariff affordability levels in each scheme and levels o f assumed consumption. REA should also demonstrate its ability to finance the subsidies and the impact of those schemes on its financial situation. With regard to the direct subsidies on the connection fees, REA has agreed that a review o fthe subsidy arrangement will be done at mid-termo fthis project. B. Technical 74. ERT I1will use the "appropriate engineering" approach to "low cost" technologies rather than a specific technique. Most o f the technologies to be used have already been used in Uganda, such as the single phase two wire system, or have been proven in similar countries. Hence, the project does not raise any significant technical concerns. 75. The "appropriate engineering" approach will consider the existing networks, design, materials used, and methods o f construction that enable lower cost networks to be constructed without changing the basic network operational standards. The introduction o f low cost technologies like the Single Wire Earth Return (SWER) and cost reduction in conventional networksusingappropriate engineering will require innovation and training and will be provided for inthe consultant support to REA for the detailed design o f grid and off-grid systems. 17 C. Fiduciary 76. The overall responsibility for IDA and GEF project financial management, promotion, and monitoring and evaluation will be vested in the Project Coordination Unit (PCU) under the supervision of the Permanent Secretary in MEMD. The unit will be responsible for ensuring proper accountability for funds relating to components that it will directly implement and for coordinating the accountability for transactions relating to activities implemented by the line ministries. A full organizational structure describing the unit and key staff duties within that structure will be detailed in the operational manual. The accounting and finance function i s headed by a suitably qualified and experiencedperson and assisted with appropriately qualified internal staff. 77. The PCU also has been designated by the board of the UECC as the secretariat. This responsibility will be maintained at least until the board designates a Managing Director. The Private Sector Foundation Uganda (PSFU) will have the responsibility for business development assistance. The PSFU has a satisfactory track record in ensuring proper accountability for funds under World Bank projects they have previously implemented. The Uganda Communications Commission (UCC) will be responsible for the ICT component of the project. An assessment of the financial management arrangements for the UCC indicates that they are sufficient to meet IDA'Sminimumrequirements with regard to financial management under OP/BP 10.02. Action plans to strengthen the financial management systems for the implementing agencies, where these systems are found to be weak, are detailed in Annex 7. 78. The Phase I1IDA Credit is intendedto be disbursed to the implementing agencies based on submitted quarterly unaudited InterimFinancial Reports (IFRs) which all agencies have been using under ERT I.Details of the financial management assessment are given in Annex 7. This includes an agreed plan of actions to achieve identified improvements and mitigate potential riskswhere necessary. 79. The financial management arrangements for the project have an overall moderate risk rating, which satisfies the Bank's minimumrequirementsunder OP/BP 10.02, and are adequate to provide accurate and timely informationon the status of the project with reasonableassurance, as requiredby IDA. 80. Procurement. The national legislation on public procurement as laid out in the Public and Disposal of Public Assets Act (PPDA) is generally in line with the World Bank's guidelines, except for some provisions that will be addressed during the ongoing revision of the law. The exceptions are listed in Annex 8 of the PAD. The major country procurement risk is the limited compliance with the Act, as indicated inPPDA's Audit Reports. 81. The project builds upon the procurement arrangements under ERT I,and most of the implementing agencies now have experience in procurement. The main risks are under REA, where procurement capacity i s nascent and the technical capacity to prepare, manage and monitor projects will be stretched with the increased investments. Measures to strengthenREA'S capacity were agreed as indicated inAnnex 8. The overall risk to procurement is moderate. 18 D. Social 82. ERT Iwas well-received in Uganda, particularly given its rural focus, and experience from its implementation has been used in the design o f ERT 11. Under ERT 11, there will be additional focus on Northern Uganda, since the development o f this region has become a critical issue for GoU, particularly the provision o f energy and ICT to rehabilitated social service infrastructure like health centers and schools. Similarly, increasing agricultural production by providing electricity to agricultural processing plants and facilitating better access to market information for farmers through ICT will also be integral parts o f ERT 11. 83. In addition, various options for rural electrification, including renewable power generation, solar PV systems and energy efficiency initiatives for electricity, have been included inthe proposed project. All the above aim at achieving the main development objective o f ERT 11, to increase access to energy, and information and communication technologies in rural Uganda. None o f the schemes under ERT Ihave proven contentious interms o f social exclusion. 84. Access to common assetdresources and improved livelihoods o f project-affected persons, due to potential land acquisition for infrastructure development if any, will be addressed inan inclusive manner. A Resettlement Policy Framework (RPF), which sets out the guidelines for the resettlement action plans (RAPS) to be prepared for any subproject that triggers the Involuntary Resettlement Policy, has been prepared and disclosed. Other social impacts resulting from construction-related activities will be addressed through the prepared and disclosed Environmental and Social Management Framework (ESMF). Each subproject progress report will include monitoring o f the RAP and other social issues covered by the ESMF. E. Environment 85. The project supports interventions designed to increase access to modern energy, information and communication technologies inUganda. The project i s expected to have positive overall environmental impact through promoting renewable energy generation and energy efficiency. Some project activities, however, may have localized adverse environmental impacts, e.g. changes in hydrology, vegetation clearance or soil erosion through construction and operation o f small hydropower facilities. To manage these impacts, an ESMF has beenprepared and disclosed. The ESMF provides step-by-step guidance on how to identify potential adverse environmental and social impacts from project activities, and how to plan, implement and monitor measures to mitigate them. The ESMF continues to utilize procedures and practices established and successfully implemented during ERT I,and reflects consultations with the project stakeholders. Through TA, the project i s expected to enhance capacity for environmental management inthe rural power sector at district/municipal levels and inthe private companies. F. Safeguard Policies 86. The ERT I1project activities may have limitedadverse environmental and social impacts, triggering the OP/BP 4.01 on Environmental Assessment as well as policies on Natural Habitats (OP/BP 4.04); Involuntary Resettlement (OP/BP 4.12); Physical Cultural Resources (OP/BP 4.11); Forests (OP/BP 4.36); Safety o f Dams (OP/BP 4.37), and Projects on International Waterways (OP/BP 7.50). The project i s rated as environmental assessment category "B". 87. To ensure compliance with these policies, an ESMF and RPF were prepared, and a Riparian Notification issued. The ESMF was cleared by the Uganda National Environmental 19 Management Authority (NEMA) and the Bank. The ESMF and RPF were disclosed at the World Bank's Infoshop on October 31,2008, and incountry onNovember 10,2008. The ESMF guides the screening of project investments for potential adverse environmental and social impacts and triggering of other safeguardpolicies, as well as preparation of detailed environment assessments and managementplans. 88. With respect to Safety of Dams, the policy applies because the project may involve the support of mini-hydro power projects that would involve small dams less than 15 meters in height. In case small dams will be financed during project implementation, the design criteria, specifications, and other relevant documents will be submittedto the Bank for its prior review. Further, should any subproject be dependent on one or more dams, arrangements acceptable to the Borrowers and the Bank will be developed and implementedto ensure compliance with OP 4.37. These will include, if required by the Bank, an inspection and comprehensive safety evaluation of the dams, and development of an appropriate emergency preparedness plan. The ESMFprovides screening guidelines for any such subprojects. 89. Safeguard policies triggered and their respective safeguard instruments are indicated in the table below. SafeguardPolicies Triggeredby the Project No Environmental Assessment (OPBP 4.01) Applicablebecausethe programwill support investmentswith potential adverse environmental impacts. Since their locationcannot be identified [I ex-ante, the safeguard instrumentused is the ESMF.For activitieswith significantimpacts, specific EAs and EMPs will be prepared. Natural Habitats (OPBP 4.04) Applicablebecausesome subprojectsmay adversely impact on natural habitats. The ESMFswill be usedto screen projectactivities for such impacts. Pest Management(OP 4.09) Physical Cultural Resources(OP/BP 4.11) Applicablebecauseproject investmentswill involveconstructionand therefore may affectphysicalculturalresourceseither throughknown site characteristics,or through `chance finds.' InvoluntaryResettlement (OP/BP 4.12) Applicablebecausethe projectmay support interventions that could entail landtakingor limiting access to land and other resources.An RPF has been developed in order to address this policy. Indigenous Peoples (OP/BP 4.10) Forests (OP/BP 4.36) Applicable becausethe project investmentsmay have adverse impacts on forests. The ESMFwill be usedto screen project activities for such impacts. Safety of Dams (OPBP 4.37) Applicablebecausethe projectmay support mini-hydro power [XI [I development that would involve small dams. Projects inDisputedAreas (OP/BP 7.60)* E l [XI * By supporting the proposedproject, the Bankdoes not intendto prejudice the final determination ofthe parties' claims on the disputed areas 20 Projects on International Waterways (OPBP 7.50) Applicable becausethe projectmay support mini-hydropower [I developmentthat may involve internationalwaterways. Riparianhas [XI been issued*. G. PolicyExceptionsand Readiness 90. There are no policy exceptions. The Notification periodlapsedon March 13,2009. No responses were received. 21 Annex 1: Country,Sector and.ProgramBackground UGANDA: Energyfor RuralTransformationI1 1. This annex has five sections. Section Idescribes the original overall design of the Energy for Rural Transformation Adaptable Program Loan (ERT APL), while Section I1describes the changes made during implementation. Section I11 presents the current status o f the program, while Section IV summarizes the findings of the mid-term review, which included a team o f internationally recruited independent experts to consider the issue o f the autonomy and functioning of the Rural Electrification Agency (REA). Section V concludes. I.OriginalAPLDesign 2. The ERT APL was approved by the World Bank Board in 2001, Ina parallel action, the GEF Council also approvedERT as its first Strategic Partnership. These actions created the ERT program as a series o f three projects, with the following indicative financing plan: Table5: FinancingPlanfor UgandaEnergizingRuralTransformationProgram IDA GEF Others Total (US$@ % (US$m) (US$m) (US$m) APL 1 49.15 39.9 12.12 62.04 123.31 APL2 45.00 37.5 9.00 66.00 120.00 bPL31 71.00 I 36.2 8.90 1 I 116.10 I 196.00 I Fotal 1165.15 1 130.02 1 244.14 1439.31 Objectives 3. The long-term purpose of the program is to develop Uganda's rural energy and informatiodcommunication technologies (ICT) sectors, so that they facilitate a significant improvement in the productivity o f rural enterprises as well as the quality o f life o f rural households. For this to happen: The conventional model of government-led rural electrification has been replaced by a private-sector led, commercially-oriented rural electrification program; and The rural energy and ICT sectors are selectively buildingand exploiting synergies, on the one hand, betweencross-sectoral assets inenergy and ICT, and on the other, with end-user sectors such as health, education, agriculture, water and SMEs, while avoiding unnecessary inter-sectoral linkages that may spread implementation difficulties from one sector to other sectors. 4. The proposedprogram is also intended to contribute to global environment protection by reducing greenhouse gas emissions. By supporting renewable energy sources, the program i s expected to achieve this objective while at the same time making a significant contribution to rural transformation. Phasing 5. In2001, Uganda lacked both the capacity and an appropriate institutional framework for the type o f commercially-oriented rural electrificatiodICTs and renewable energy development 22 envisaged in this APL, and upon which a large-scale program could be built. The ten-year APL i s divided into three phases. The first phase was designed to start small in terms o f investment, while in parallel building the necessary capacity as well as the institutional and policy framework, with the pace of investments to pick up inthe second and third phases. Strategy 6. For rural electrification, the GoU adopted a commercially-oriented approach towards rural electrification, with the GoU playing the role o f a market enabler. The main elements o f the policy platform to support implementationo f this strategy are: 0 Level playing field for private sector participants 0 Enabling regulatory framework 0 Cost-recovery and cost-based tariffs 0 Well-targeted subsidy schemes 7. For renewable energy, the GoU formulated a strategy to establish a regulatory and investment climate within Uganda that promotes private sector-led, commercially-oriented development o f these resources. 8. For ICTs, one o f the GoU's objectives i s to extend access to voice telephony and Internet services into the rural areas. The Rural Communications Development Fund(RCDF) serves as a mechanism for financing the achievement o f universal service objectives in areas not considered to be commercially viable by the private sector. 9. Project components for ERT Iare given inTable 6, and indicative components for ERT I1 and ERT I11are shown inTable 7. 23 Table 6: ProjectComponents-Phase I Component Indicative Bank Yoof GEF Yoof costs Yoof GEF 0 IIJs$M) Total inancing Bank inancing inancing YS$M) financing 1 Main Grid-related Power - 45.55 36.9 20.80 42.3 4.60 38.0 Distribution & Generation 2 - Independent Grid Systems 26.14 21.2 6.50 3.2 1.oo 8.3 3 Solar PV Systems - 10.80 8.8 0.00 0.0 1.40 11.6 4 - Cross Sectoral 12.44 10.1 7.60 5.5 0.80 6.6 5 - Capacity Building, Technical 15.88 12.9 8.75 17.8 4.32 35.6 Assistance, Training, M&E 6 - ICT 12.50 10.1 5.50 11.2 0.00 0.0 rota1Financing Required Table 7: ProjectComponents (Phases I1and 111) finyz{ I I I I 1 I 1 Bank- Component Indicative Yoof Yoof costs %of cing Bank- GEF (US$M) Total (USM) financing (US$M) financing 1 REInvestments - 203 64 74.56 64 13.36 74 2 - CrossSectoral 36.88 12 17.82 15 0.63 4 3 - Capacity Building,Technical 49.08 15 19.26 17 3.89 22 Assistance, Training ' 4 - ICT 27.04 9 4.36 4 0 Phase2 and 3Total j 316 100 116 100 17.88 100 ~ ~ ~ ~ 1 Institutionaland ImplementationArrangements 10. ERT Phase Isupported creation o f the new entities called for in the Electricity Act of 1999: the Electricity Regulatory Authority (ERA) and the Rural Electrification Fund (REF). In addition, the project supported other key actors in developing their roles to ensure that the new structure functions efficiently: 0 MEMD, Rural Electrification Board (REB), and Rural Electrification Agency (REA); Uganda Communications Commission (UCC); 0 Ministriesof Finance, Health, Education, Water, Agriculture and Local Government; 24 0 Bank o f Uganda (BoU); 0 Project sponsors, a Business-to-Business Advisory Facility operated by the PSFU, and financial institutions; and 0 Endusers, including small andmediumenterprises. FinancingMechanism 11. A key issue is the need for a workable financial intermediation system for rural electrification and renewable energy development. For large and medium credits, the project has a two-pronged approach to developing the neededfinancial intermediationmechanism: 0 Make all efforts to finance rural electrification and renewable energy development part of the normal functioning o f the financial sector; and 0 Take into account the practical barriers and gaps, and provide Ugandan institutions with interim financial mechanisms-with a clear exit strategy-that allow them to overcome the barriers and gaps. 12. Based on discussions with the representatives o f bank and non-bank financial institutions, Ministry o f Finance (MoFPED) and BoU, it was decided to develop and implement a Credit Support Facility that would make it feasible for financial institutions to provide the necessary credit for private-sector led rural electrification. In the interim, until the above facility became functional, IDA funds were been made available to refinance, on market terms, commercial loans-with the commercial banks taking the market risk-for a limited number o f investment projects. Sustainabilityand Risks 13, In2001,the mainconcernabout sustainability was whether the program was too large and too complex, given Uganda's limitedabsorptive capacity. Since none o fthe sub-components o fthis project was particularly complex and/or risky on its own, the "complexity" concern arose from: (i)thenumberofsub-components, whichrepresentdifferentservicedeliverymodesincludedinthe project; and (ii)the stretching o f the project's boundaries to include ICTs and cross-sectoral linkages to health, agriculture, education, and water. It was noted that the risk implications o f the complexity were the greatest in Phase I,during which a number o f innovative concepts and procedures were to be introduced. 14. A second concern related to the sustainability o fthe various sub-projects supported under this program. In particular, it is important that the individual sub-projects continue to provide adequate and reliable service over the years, meeting demand as it grows over time, and that renewable energy development continue even after GEF grants are no longer available. 15. A third concern was sustainability for renewable energy after the program, when GEF grants would not longer be available. The overall approach is that, over time, sustainability will come from barrier removal, cost reductions, rising incomes, and declining GEF grants. 16. The overall risk rating for ERT Phase Iwas S (Substantial Risk). It was anticipated that the overall risk rating for the proposed ERT I1 would be lower, because all the fundamental modalities would have already been demonstrated. 25 11. Changes MadeDuringImplementationof Phase I 17. There were no substantive design changes during the implementation o f Phase I. However, there were a few operational changes: 0 MEMD engaged a project coordinator, who has acted as a focal point for project oversight and supervision, maintained a consolidated project tracking system, and undertook trouble shooting as needed. 0 Based on the actual disbursements, at mid-term, funds were reallocated in favor of the UCC and the Ministry o f Water, as they had shown good progress. GEF funds were usedto finance the purchase and distribution of energy efficient lights in order to helpUganda cope with power shortages. For solar PV systems, the P V Targeted Market Approach (PVTMA) was developed to increase further the penetration o f solar PV systems beyond what was possible with GEF subsidy support alone. 111. Current Status Disbursements 18. Following the mid-term review, project implementation accelerated as procurement and other hurdles were overcome. Despite this acceleration, two project extensions were required. The first was a two-year extension that shifted the closing date from August 2006 to August 2008. A second six-month extension pushedthe closing date to February 28, 2009. 19. The actual and projected IDA and GEF disbursements are shown below (Figures 1 and 2). At present, project resources are virtually fully committed, though closure o f some contracts could possibly extend beyond the ERT Iclosing date. Hence the full amount o f IDA and GEF resources may not be fully disbursed. 20. In accordance with OP 6.00 on Bank Financing, up to US$7.5 million may be used for retroactive financing o f ERT I1 eligible expenses incurred on or after January 1, 2009. These include completion o f ERT Icontracts under REA and MoES. 26 Figure 1: IDA CumulativeDisbursements IDA Cumulative Disbursements ,'M .- Up to Dec03 June04 Dec04 June05 DecO5 June06 Dec06 June07 Dec 07 June08 DecO8 Feb09 June 03 -+-Projected Disbursement -c Disbursement Actual Figure2: GEF Cumulative Disbursements GEF Cumulative Disbursements "_______-_. .l_______l_-__.I- 12 10 4 2 Upto Dec 03 June04 Dec 04 June05 Dec05 June06 Dec06 June07 Dec 07 June08 Dec08 FebO9 June03 +Projected Disbursements -c-Actual Disbursement PhaseI1Triggers 21. The triggers for Phase I1and their current status are shown below (Table 8). Most of the triggers have already been met, and most of those remaining are on track to be met during the preparationof Phase 11. It is unlikely that the sub-indicators for the ministries of Educationand 27 Agriculture will be met, which reflects the same problems responsible for the delays in the disbursement o f their allocated funds. Table 8: Status of Phase I1Triggers Trigger Tracking Indicators Status Comleted Pla Establishmentof 0 Regulator (ERA) has approved several *egulatorysystem for rural electrification transactions (West Sile, :kctrification Kisiizi, Rukungiri-Kanungu, Kibaale, Kalangala, Kilembe InvestmentsLimited) P1 Establishmentof a regulatory 0 Plan for light-handed regulation is complete system for rural electrification, Comuleted satisfactoryworking of REB, REA 0 REB, REA and REF established b) Statuto5 and REF Instrument 2001 No. 75. At the mid-term Plb Satisfactory working of evaluation, based on a repor! by independent REB, REA and REF experts it was agreed thar in Phase I there was no need to change the legal basis ofthese agencies REB has approved subsidies equivalent to about USSISm from the REF P2a Establishmentof Credit Comleted SupportFacility Credit Support Facility created, though not operational Comleted P2 A workable financial Several banks financing investmentsin Phase I: intermediation mechanismfor rural East African Bank-financed Kakira and electrification is inplace P2b Commercial debt WENRCO through the BoU RE-finance financing become available faciIity 0 East African Development Bank to support the Kikagati IOMW mini-hydropower project with a loan of US$I8.0 million Partiallv Comuleted 0 WEKRCO began supplying power for 18 hours per day starting October 2004, P3a Electricity (MWh) comparedto four hours per day under Uganda produced Electricity Board. Recently, WENRECO has experiencedoperational problems, which are P3 Satisfactory functioning oftwo being addressed by GoU and WENRECO independent grid rural electrification Kisiizi commissioned in February 2009 operations has been achieved Partiallv Comleted P3b Connections made WEKERCO has connected 1600 ne\+ consumers since October 2001, Kisiizi includes 200 initial connections P3c Community satisfaction Suney delayed due to delay in GoU investments Substantiallv Comuleted (installedsystems reuorted to be oueratingsatisfactorilvl P4 Satisfactory functioning of 80 Water: All target installations have been percent of the energy systems completed providedto water facilities, health P4a Percentagefunctioning 0 Health: Installationscompleted clinics, schools, and agriculture well 0 Schools: Installation ongoing and expectedto linked users be completed by end June 2009 Agriculture: Connectionssubject to some load sheddingbecauseof overall power shortages 28 status Yubstantiallv Comleted Lnstallation of the health and water systems P4b Customer satisfaction completed January 2009, while those of education are ongoing. Survey to be conducted after Phase I installations are complete. Indications are that installed systems are functioning satisfactorily. Comleted Kakira (biomass cogeneration of 21 MW) supplying 12MW to the grid starting April 2008 Construction of 3.5MW West Nile mini-hydro power station ongoing, completion expected February 2009 P5 15MW of renewable energy Kisiizi 350KW mini-hydro power station power generationfacilities P5 No sub-indicators completed February 2009 constructed or under-construction Licenses issued for following mini-hydro generation facilities: Kikagati IOMW Ishasha5MW Bugoye 1I M W (construction started) Mpanga I O M W P6a Householdsales Comleted P6 320,000 cumulative Watt-peak Cumulative installed 186,000 Wp sales of solar PV systems to Comlefed householdsand institutions has been achieved P6b Institutionalsales Cumulative installed 1.22 MWp Cumulative total from all market segments I.4 MWp Comleted P7 Solar home system price Average cost is US$12-17 per Wp, depending upon reduction of 30% from June 2000 type of system (SHS or institutional); however, due baseline has been achieved (Le., to international market influences, the price of end-Phase 1price of about P7No sub-indicators crystalline silicon has fluctuated so that overall US$14/Wp compared to about price of PV systems has not remained consistently US$2O/Wp in June 2000). low. The cost of the balance-of-systems, however, has fallen farther than expected. Comleted P8a Final plan shows "Clear Renewable Energy Policy in published. The Policy evidence of Government includes a standardized feed in tariff structureand commitment to a long-term standardized Power PurchaseAgreement (PPA). renewable energy development Capacity building achieved through on-job training P8 Finalizationand implementation program" and "wheeling" of personnel should also be permitted. Sales-BasedPerformance Grants Programand the of first phase of long-term Solar PV Targeted Market Approach (PVTMA) renewable energy capacity building initiated strategy and action plan including Initial capacity building in public sector (e.g. REA, financingof recurrent cost of ERA, MEMD) complete; capacity building in renewable energy projects and P8b Implementation offirst institutional arrangements has been phase of long-term plan private sector ongoing; initial investments ongoing or complete; pipeline of projects-mostly mini- achieved. hydro-is growing P8c Action plan for ensuring Comleted that solar PV consumers have Institutionalsystems (water and health) include sufficient funds for replacing their key parts-batteries and operational maintenancecontracts and confirmation of budget allocations from the respective charge controllers beneficiary district 29 status Comleted P9aNo. of homes, enterprises, public institutions with Increasefrom 8%-13.3% with direct increased access to ICTs connections More than 40% access via public pay phones Comleted P9 Phase 1 coverage objectivesfor P9bNo. of Public and Private rural telephony, internet points of phones installed in previously 10,393 -Operators presenceand rural telecenters has unserved sub-counties 316-UCC been satisfactorily achieved. 779 -U A funded Comleted P9cNo. of District 20 postal telecenters installed by UgandaPost headquarterswith POP and Limited public Internet access facility Installation of 16telecenters (nine schools and seven NGOs) ongoing and expected to be completedby end-February 2009 Comleted P9dNo. of rural telecenters established in `vanguard' Installation of 19 telecenters ( I O schools and institutions nine NGOs) ongoing and expected to be completedby end-February 2009. Comleted P9eAvg. cost per minute of Telephone price declined from 400 Ug various services in rural areas Sh/minute in 2005 to 250 Ug Sh (US16 cents)/minute at present Internet 50 Ug Sh (US 3 cents)/minute P9f Ratio of government subsidy to private investment Comleted for public telephones, Internet POPSand Telecenters 1:l P10 Collectionof at least 80% of the telecommunicationsuniversal Comleted service levy revenues that are P10No sub-indicators billable by the end of Phase 1 has Collectionrates at 95% as of December 2007 been achieved IV. Findings of Independent Review Team 22. As part of the preparationprocess, GoUcommissioneda team of independent consultants to prepare a review and recommendations for both the country's broad rural electrification framework as well as the ERT project. The report was delivered to the GoU in September 2008, and i s summarized below. 23. Relative to the Phase Itargets, ERT implementation has reached a commendable level of performance. However, on the supply side, institutional procedural requirements delay timely implementation of program activities. 24. Some o f the major achievement to which the ERT contributed are: a) A Renewable Energy Policy has recently been approved. This policy allows for rural energy supply with conventional and non-conventional and renewable alternatives and hasprovisionsto scaleupenergy servicesfor ruralareas. b) The REFis inplace andhas fulfilled its foreseenfunctions, althoughto a limiteddegree. c) The REA is actively involved in rural electrification and has a capable although limited 30 number o f staff. Despite all criticism and caveats about the way the West Nile project i s being implemented, it is providing the lowest mini-grid tariff in the country. Also, the Nyagak hydropower scheme i s now under construction, despite all the set-backs experienced by this scheme since 1991. The cogeneration facility at Kakira started operating and delivering power to the national grid, andother sugar industries showed interest inparticipating. The involvement o fthe BoUinthe ERThas beenpositive andfulfills its objectives. A firm foundation for better energy planninginhealthcenters through standardization of system designs, sizes, and operation andmaintenance costs has beenachieved. The water sector component has beenquite successful and experienced few problems. The projects implemented directly by the MEMD have achieved different degrees o f success, with the energy efficient lighting and SME projects achieving a fair degree o f success. Although the project did not succeed inlowering the Wp price from US$20 to the target o fUS$14, it still was instrumental inlowering it to US$16.5. The intervention o f the PSFU has beenpositive and instrumental to achieve the output o f the solar PV component. 25. The ERT project was not able to fully achieve some of its objectives due to an array of difficulties that ranged from an incorrect perception o f the possibilities o f the private sector to an ambitious project structure involving too many stakeholders. Some o f the issues are: In most projects (either grid-based or isolated grids), the private sector did not respond as expected. When it did respond, the private sector did not bring the equity that was envisaged. On the other hand, if more equity was provided this would increase the kWh price and make electricity unaffordable for large parts o f the population. The baseline studies for a paradigm change to private sector implementationhave not been done carefully enough, or not done at all. This includes the assumptions on the purchasingpower o f the rural population, leading to incorrect demand projections, as well as incorrect perception of the ability of the private sector to step into the place previously occupied by the GoU. The many disagreements between the M o H on one side and the MEMD and the World Bank (WB) on the other on the kind o f energy packages suitable for the different types o f health centers delayed component implementation. The education component has experienced serious problems with the MoES. However, at the time o f writing this final report, steps were being taken to solve most problems. The decision process to support agriculture or industry with a business plan in the Agriculture component involves not only the MAAIF, but also the PSFU, REA and the MEMD,andthis has provedto be cumbersome. The projects to be implemented directly by the MEMD have achieved different 31 degrees o f success. A study on biomass gasification inUganda was done, but the pilot projects are still waiting for procurement o f the gasifiers. The Indicative RE Master Plan (IREMP) was to be prepared by MEMD in conjunction with the REA, and this activity has not yet been completed successfully due to problems with the consulting firm drafting the plan. The procedural triangle of approval between consultants, ministries and the WB (the No Objection requirement) has often delayed project implementation. Procurements procedures are a headache for most involved, but these are necessary to guarantee transparency, and they are integral part o f any WB program. ERT procurements sometimes take a long time, because of lack of in-house capacity at the involved ministries and contradictory responses from the WB. Eventhough the problems with procurement might be caused by the time needed for adapting and the "learning curve", it i s doubtful whether this was the right way to go concerning costs and sustainability of these efforts. However, this effort has been internalized in some ministries; inothers, such as Education and Agriculture, difficulties remain. The decentralization process going on in Uganda has many benefits, but it can slow the implementation pace of RE if not handled strategically. Institutional and community ownership i s needed for the planned projects to advance, but decision making on RE project technicalities will need the intervention of centralized and specialized institutions as the prime drivers. Local authorities are mainly and logically drivenby a political agenda that may marginalize technology and economics and thus result in unrealistic expectations arising from a lack o f sufficient, sustained and focused information on the RE development plans. There is a perception among stakeholders that the WB i s spending an excessive amount o f money in TA to the detriment o f infrastructure investment. The amount spent on consultancies (18 percent o f the total budget o f Phase I)is very high, and it can only be hoped that the results o f Phase I1willjustify this expenditure. Recommendations 26. The main recommendation is that the WB makes funds available for the implementation o f Phase 11. The main two areas that should be o f priority for enhancing Phase I1 are: (i)a reformulation o f the role o f the private sector in the roll-out o f the RE program, and (ii)a streamlining of approval procedures, inparticular that o f the "no-objection" approval. 27. More emphasis should be placed on implementation and financing o f projects inthe next phase o f the ERT. 28. In order to fast-track the rural electrification coverage with a focus on social equity whereby no part of Uganda or group o f people feel excluded from the benefits o f rural electrification, as well as to make an impact on poverty, the REA should be strengthened to effectively take up its role as the lead organization inthe REprogram. 29. For the ERT Phase 11, funds should be again made available at the BoU to refinance renewable energy supply schemes. The CSF should be established ifviable. 30. With some additional training to the staff at health centers, the roll-out o f solar PV systems to health centers should be implemented. Also, additional financing should be found for 32 expanding the PV pumping activities o f the Ministry o f Water and Environment, where this makes economic sense. 31. In general, capacity should be created for the focal ministries to discuss and decide on relevant energy options. However, the responsibilities for design and procurement o f RE technology and consultancy should be limited to the REA. Creating technical capacity at the Ministry of Educationand Sports should be reviewed given the constraints the ministry faced in Phase I.The rural electrification activities o f the MAAIF should also be reformulated and many o f the technical tasks allocated to this ministry given back to REA. 32. More effort should be put inpromoting biomass gasification. 33. The successful introduction o f energy efficient lights should be followed inPhase I1by a self-sustaining market-orientedmechanism. The efforts at introducing energy efficiency concepts at SMEs and using traditional fuels (mainly biomass) should be continued, but with more concrete projects implemented and adequate financing for them. 34. Since the ICT component has fully met some o f the Phase Iobjectives, all uncompleted aspects by close o f Phase Ishould be completed in the subsequent phases o f the ERT project. These include completion o f the provision o f public phones inthe remaining 64 sub-counties and the provision o f Multipurpose Community Telecenters. V. Conclusions 35. While the implementation o f Phase I was delayed, it is clear that most o f the implementing agencies have now fully internalized their role and activities under the ERT program, and are ready to move to Phase 11. The project planprepared by the GoU embraces the ERT approach, and takes into account the lessons learned during the implementation of Phase I. The main recommendation o f the independent review i s that the Bank move to Phase 11, subject to some fine-tuning adjustments based on the implementation experience. 36. After some initial delays, the disbursements and trigger-indicators for Phase I1 are on track to meet their target values, apart from two lagging agencies, whose work plans have been significantly redesigned for Phase 11. 37. Inshort, the time has now come to move to ERT11. 33 Annex 2: Major RelatedProjectsFinancedby the Bankand/or Other Agencies UGANDA: Energyfor RuralTransformationI1 Project Sector Issue IP Closed Power I11 WB The project builds uponthe MU rehabilitation work begununder the Second Power Project, and expands Uganda's hydro-resources and its transmission and distribution system to provide least cost reliable electricity to a greater population. It also aimed to improve the power sector's efficiency, inparticular the UgandaElectricity Board's financial situation, through policy reforms, institutional strengthening and establishment or realistic tariffs. Power I11 WB As above Not rated Supplemental Public Utility WB Improve the quality, coverage and Not yet S S Reform economic efficiency o f commercial and available utility services, through privatization, private participation in infrastructure, and an improved regulatory framework Power IV WB (a) Improve power supply to meet MS MS demand by supporting critically needed investmentsinthe sub-sector; and (b) Strengthen Borrower capacity to manage reform, privatization, and development inthe power and the petroleum sub-sectors Ongoing Energy for Rural WB Put inplace a functioning conducive S S Transformation environment and related capacity for commercially oriented, sustainable service delivery o f ruralhenewable energy and Information & Communication Technologies Private Power WB Provide least cost power generation S S Generation capacity by supporting construction o f a (Bujaga1i) 250MW hydro power plant Project Power Sector WB Reduce short term power shortages and S S Development financial imbalances, and facilitate 34 Operation I orderly longer term expansion o f I electricity service Other DeveloDmentvAgencies Rural SIDA Increase access to modern energy Not Applicable Electrification services by supporting investments in Proiect Phase I1 grid extensions inrural areas Rural JICA Increase access to modern energy Not Applicable Electrification services by supporting investments in Phase I11 grid extensions inrural areas Energy GTZ Provide capacity building support to the Not Applicable Advisory MinistryofEnergyand Minerals Project Development inthe areas o f energy efficiency and conservation Infrastructure Put inplace functional markets for Not Applicable for Agriculture agriculture products by supporting Development constructiono f market infrastructure equippedwith electricity services either from the existing grid or other alternatives such as solar systems and diesel generators 35 Annex 3: ResultsFrameworkand Monitoring UGANDA: Energyfor RuralTransformationI1 PDO ProjectOutcome Use of ProjectOutcome Indicators Information Project Development Objective: YR1-YR2: Assess possible To increase access to energy problems inintensification and and information and grid extensionroll-out communication technologies [ICTs) in rural Uganda. YR3: Determineeffectiveness of rural electrificationarrangements Increased access to energy 1. Percentage of ruralpopulation YR4: Informstrategy for scale-up with access to electricity in during Phase111. project areas. (Rural electrificationrate) Increased access to ZCT services 2. Percentage of the geographical area with access to modemICT *** services *** GEFObjective: *** To increase use of renewable energy technolopies YRl-YR2: Gauge policyand regulatory environmentFor Increased use of renewable 3. MW ofadditionalpower energy efficiency andRenewable energy in Uganda generationfrom renewable Energy.Monitor effectivenessof sources roll-outprogram 4. Tons of C02 emissions YR3-YR4: Feedinto sector reduced/ avoidedas a result of strategy for increaseduse of the project. Renewablegeneration technologies IntermediateOutcomes IntermediateOutcome Use of Intermediate Indicators OutcomeMonitoring Component 1 - Rural Energy Infrastructure: YRl-YR3: Assess pace of grid extension, independentgrids, Improved rural electrification roll-outof solar PV installations, through: and private sector participation. -Grid Extension 1.1- Number o f households connectedthroughthe extended YR4: Reviewresults and draw grid. lessons for PhaseI11strategy and -Independent Grids 1.2 - Number o f households mainstreamingin Government connectedthrough independent programs. grids. - Solar P V for 1.3 Number of householdsusing - Households _ _ _ _ Solar PV systems. _ _ _ Increased private sector 1.4 Capacityof solar PV systems _-- involvement in renewable soldby privatecompanies YR1-YR2:Gauge policy and energy. supportedby ERT-I1(KW) regulatory environmentfor 36 Renewable Energy and energy efficiency, Improved Energv Efficiency 1.5 Percentreductionin large - industrial/commercial loads in YR3-YR4: Feed into sector target locations. strategy for increaseduse of Renewablegeneration and energy efficiency. Component 2 - Information and Communication Technologies (ICTs): YRl-YR2: Flagpossible problems inroll-out of ICT Imwoved access bv rural 2.1Number of Community services; Informs corrective communities to modern ICT InformationCentersestablished action. services. inun-servedandunderserved areas YR3: Determine effectiveness, affordability and reach. 2.2 Number of sub-countieswith YR4: Inform strategy for scale-up public broadbandInternet access during Phase 111. ooints Component 3 -Energy Development, Cross Sectoral Links, Impact Monitoring: YRI-YR2: Flagpossible 3.1- % of HealthCenters(HC-I1 problems inREA'Scapacity to Increased access to electricity through HC-IV) with access to implement RE. and ICTs bv: electricityin24 districts YR3: Inform remedial action (including 11 districts in Northern decisions o Health Centers Uganda) YR4: Inform strategy for scale-up o Schools during Phase 111. o Water Pumping Stations 3.2 Number of level four health o Agri-Business / Farms centers(HC-IV) with computers and Internet access 3.3 Number of rural schools with accessto electricity 3.4 Number of rural schoolswith accessto computer labs 3.5 Number o f additionalWater supply schemes with access to electricity 3.6 Percentof localgovernments actively engaged inrenewable energy or energy efficiency investments 3.7 Number o f large agri- Business/ Farmswith access to electricity 37 '5 u 3 - u 6 3 E 5 e2 Q 2 u u 3 0 .r S L .r c C E E c I r 2- 5 - 00 6L m c v E- 3 9 N 5EgE 2$1 8 9 In 2 e L s m 9 9 n 4 2$1 9 - 00- 5 9 d 0 2E Y3 U Y Fl P 0 vl -s . N n 9 9 d 0 30 3 2 d R n 3 iT 2 m 0 9 9 - n vl 3 x01 3 C 0 d 5 Annex 4: DetailedProjectDescription UGANDA: Energy for Rural TransformationI1 1. When the three-phase ERT program was designed, the IDA funds for ERT I1 were estimated at US$45 million. However, GoU has requested additional IDA funds, mainly due to the absence o f adequate private interest and funds for rural electrification. Overall IDA financing has thus been increased to US$75 million. Nevertheless in view o f Uganda's low electrification rate and limited availability o f public funds, there still remains a need to attract additional funds from donors andthe private sector. Several donors have expressed an interest in cofinancing, and a detailed agreement has been reached with the German cooperation agencies GTZ and DED. Umeme-the main Ugandan electricity distribution company-is also in discussion with IFC for support on an extension project which could add about 60,000 new connections. Moreover, the Arab Bank for Economic Development inAfrica (BADEA) and the Saudi Fundfor Development have indicated a willingness to provide cofinancing o f about US$20 million, if so requested. Cofinancing o f approximately US$5 million i s also being sought from a proposed Trust Fundto Support Energy Small and Medium Size Enterprises in Sub-Saharan Africa.* These additional funds will complement the ERT I1activities, allowing REA to substantially scale-up its access targets. Changes toProject Design Based on ERTI Implementation Experience 2. An independent review commissioned by the GoU presented its findings in September 2008. The report's findings (Annex 1) have been taken into account in adjusting the design o f this project. 3. The original design did not call for extensive coordination or meetings. This was intended to allow each implementingagency to play its natural role. The flexibility o f this design has encouraged many agencies to take ownership o f their programs and successfully implement them. However, it also made it difficult for the Ministry of Energy and Minerals Development (MEMD)to promote implementationinlagging agencies. 4. This deficiency was addressed during Phase Iimplementation by creating a Project Coordination Unit (PCU) inMEMD.However, the GoU's evaluation report identifies substantial ongoing weaknesses, and the proposed project will support a stronger PCU located in MEMD. An alternative PCU location in the REA was considered, but it was deemed important to allow REA to focus on its core mandate of access expansion without the burden of also operating the PCU. Hence the PCU location inMEMDwas retained. 5. The GoU's Rural Electrification Framework (REF) review concluded that the REA's creating legislation limits its autonomy and makes it susceptible to undue political influence. However, it has been decided not to upgrade REA's legal instrumento f creation from the current statutory instrument to an Act o f Parliament. At this time, it i s important that REA's focus remain on overall rural electrification targets, where the delays arose from a combination of factors other than REA's statutory basis. Apart from the fact that the REA was a new agency, the 8This Trust Fundis beingestablishedby the World BankAfrica EnergyUnit in collaborationwith the Global Village Energy Partnership(GVEP). 41 key reasons for the delay were lack of power to support grid-based rural electrification and limitedprivate sector interest inrural electrification schemes. 6. Under ERT I,agricultural processing was a primary beneficiary of rural electrification since it provided much o f the `anchor' electricity load needed to justify grid extension to rural communities. However, an effort led by the Ministry o f Agriculture, Animal Industry and Fisheries (MAAIF) to extend electricity to isolated agricultural customers did not succeed. It has proven challenging to identify customers for whom on the one hand, electricity i s the key barrier to expansion o f their currently profitable business, yet on the other hand require a subsidy to connect to the network. Avoiding such `free ridership' while at the same time ensuring that the subsidies go to firms which will thrive with grid electricity i s a difficult balancing act. Under ERT 11, all investment in providing electricity to agricultural users will be handled by REA instead o f MAAIF, but MAAIF will participate in identification and qualification o f beneficiary agricultural enterprises. 7. Under ERT I,progress was slow in the electrification o f rural educational facilities, and there were concerns whether this activity should continue under the Ministry o f Education and Sports (MoES) in Phase 11. Recently, MoES upgraded both the staff and management focus on this component. As a result, ERT Iprogress has considerably accelerated. In September 2008, MoES signed its first set of contracts with the private sector to install electricity systems in rural schools. The contracts are expected to be about 80 percent complete by ERT Iclosure, with completion to take place during ERT 11. In addition, ERT I1will support the recruitment o f a locally based engineering consultant to assist MoES in ERT 11. The recent progress and the change in personnel dealing with this issue in MoES will contribute toward implementation success. 8. While ultimately successful, the ERT Iimplementationperiod was seven years compared to the originally anticipated four years. ERT I1 and I11 are each estimated to require four years for implementation. Hence the total ERT APL period will require 15 years instead o f the originally planned 10years. Sectoral Developments 9. In the power sector, Uganda is shifting towards a sector-wide approach (SWAp), and Phase I1 i s consistent with this shift. The GoU has set up an Energy and Mineral Development Sector Working Group (EMDSWG) whose primary objective i s to improve coordination, harmonization and alignment o f sector activities. MEMD,through the EMDSWG, is preparing a Sector Investment Plan that will form the basis o f a SWAp, with a strong emphasis on rural electrification by utilizing the REF mechanism. 10. The Bank is co-financing the Bujagali Dam, which i s expected to be commissioned in 2011. This i s expected to end power shortages in Uganda, and also make power available for grid-based rural electrification. The Bujagali Dam i s expected to be followed by other generation projects, such as the Karuma hydropower station, and i s also complemented by current and future permanent heavy fueloil-fired thermal stations. The Bank and other donors are also supporting regional integration of transmission grids, with a Kenya-Uganda interconnector among the first contemplated investments. Hence the Bank i s taking a portfolio approach to supporting the Ugandan power to ensure that investmentsaddress key sectoral concerns. 42 NationalDevelopments 11. Increasing agricultural production i s a major priority for countries in sub-Saharan Africa, including Uganda, and changes have been made in the proposed project to promote agriculture. While Phase Idid not include a component for linking ICTs directly to agricultural producers, development o f schemes for providing marketinformation to farmers i s proposedinERT 11. 12. Development o f Northern Uganda i s a major goal o f the GoU. The Bank i s working with the GoU to prepare a PeaceRecovery and Development Plan (PRDP), with the NorthernUganda Social Action Fund2 (NUSAF 2) program in support o f the Northern Uganda PRDP. One PRDP objective is to revitalize the economy by reactivating productive sectors, and this will require major rehabilitation o f critical infrastructure. The proposed ERT I1 project i s coordinated with the proposedNUSAF2 to provide energy and ICT services inthe region. 13. The Northern Uganda activities will be supported by DED, an agency of the German Ministry o f Economic Cooperation and Development, which will bear the cost of resident foreign technical experts. I nternationa1Developments 14. In the years subsequent to the design of the APL in 2000-2001, there has been an increasing focus on Output-based Aid (OBA). While the design o f ERT Idid feature OBA inthe promotion o f solar P V sales and provision o f telephone services, financed by the Global Program for Output-Based Aid (GPOBA),9 OBA can be more widely applied in Uganda's energy sector. The project will form a broad-based OBA scheme, which will be partially financed by GPOBA grant funds. 15. While the principles o f the OBA scheme have been established, the final design and implementation procedures are likely to be ready only some time after the proposed project becomes effective. The delay i s the result o f a variety o f factors, including the lack o f funds available from GPOBA. 16. The OBA scheme will be designed as a `mini-SWAP', Le., a system in which multiple donors can support a variety o f energy investments, including those outside the ERT project, with the defining feature beingthat all aid follows OBA principles. 17. The first activity under the OBA scheme will be to finance electricity connections for poor households, including those living in the area served by Umeme or other distribution concessionaires. The OBA subsidy will be available only to households that remain unconnected 18 months10 after the area has been electrified. In this period, it i s expected that the better-off households would have been connected, thus leaving only the poorer households to benefit from this scheme. The GPOBA program is a partnershipof donors and international organizationsworking together to support output-basedaid (OBA) approaches. Its mandate is to fund, design, demonstrate, and document OBA approaches to improve delivery of basic infrastructure and social services to the poor in developing countries loThis durationmay be adjusted depending on implementation experience. 43 18. This 18-month period will not delay the utilization o f OBA. Unconnected households in the areas that were electrified more than 18 months ago-including the areas electrified outside the ERT Iproject-will qualify for OBA support as soon as the funds become available. There are many such areas in Uganda, which means that the OBA funds could potentially be disbursed immediately upon approval and effectiveness o f the OBA financing. 19. Preliminary discussions have been held with GPOBA and IFC, which would channel its funds through GPOBA. They have indicated their interest in providing part of the funds for the OBA scheme, with the rest o f the funds to come from IDA and GoU, and possibly other bilateral donors, such as KfW.A Project Concept Note for GPOBA has been prepared, with a preliminary request o f US$2.5 million. GTZ will integrate a substantial part o f its energy program with ERT I1as parallel financing. 20. DEDwill provide in-kindtechnical assistance inthe form o f long-term resident technical experts to ERT I1 partner institutions for implementation support. GoU will take the lead to identify the specific resources needed and will work with DED to create a suitable terms of reference. Components 21. ERTIhad six components, and based on the implementationexperience and the desire to facilitate speedy implementation, they have been consolidated into three: (i)Rural Energy Infrastructure, (ii) Information and Communication Technologies, and (iii) Energy Development, Cross Sectoral Links, Impact Monitoring. 22. Northern Uganda. This is a new focus to be added in ERT 11, reflecting the changes that have taken place in Uganda since the APL was approved. This focus will be coordinated with the World Bank-financed Northern Uganda Social Action Fund (NUSAF) project, with ERT I1focused on the technical andhardware aspects. This focus is interwoven into each of the components. 23. The financing planis shown below inTable 9. 44 Table 9: UgandaERTI1FinancingPlan I IDA I GEF I GoU ITOTAL I Project Cost By Component and/or Activity 1.Rural Energy Infrastructure 41.0 5.7 6.7 53.4 1.1 Publicly FundedGridRelated Power Supply 26.6 6.7 33.3 1.2 Off-Grid RenewableEnergy Investments 7.4 2.2 9.6 1.3 Technical Assistance, Training 1.5 1.5 1.4 Credit Support Facility 3.5 3.3 6.8 1.5 Private Sector FoundationUganda 2.0 0.2 2.2 2. InformationCommunicationsTechnologies (ICT) 8.0 0.0 1.2 9.2 2.1 Investments 7.4 1.1 8.5 2.2 Technical Assistance, Training 0.6 0.1 0.7 3. EnergyDevelopment,Cross SectoralLinks, Impact Monitoring 26.0 3.3 1.1 30.4 3.1 Energy Packages for Health, Water, Education 20.0 2.1 1.1 23.2 3.2 Technical Assistance, Training, Operating Costs 6.0 1.2 7.2 Total 75.0 9.0 9.0 93.0 *Note: Parallelfinance from the private sector and other donorsnot includedinthis financing plan. Component 1: Rural Energy Infrastructure,(US$ 53.4 million-US$ 41.O million IDA, US$ 5.7 million GEF; US$ 6.7 million GoU) 1. The REA will be responsible for subcomponents 1.1, 1.2, and 1.3, which cover grid extensions, independent grids, solar PV systems, support of renewable energy power generation projects, and capacity building. The Uganda Energy Credit Capitalization Company, Ltd. (UECC), responsible for subcomponent 1.4, is a government-owned independent entity. The Private Sector Foundation of Uganda, responsible for subcomponent 1.5, is also an independent entity with its own mandateand governing body. 2. Publicly funded grid related power supply. The bulk of the IDA funds under this subcomponent will be used to finance REA-sponsored main grid distribution extension to rural areas. Main grid renewable energy power generation will be financed by the private sector, whichmay access IDA or GEF funds via the Credit Support Facility (Annex 16). 3. In Phase I,REA was successful in financing new distribution access projects under an arrangement inwhich REA constructs, with GoU ownership, projects that meet agreed criteria of economic and financial viability. These projects are concessioned to the private sector under a management contract that includes provisions for new expansion through private debdequity. This approach will be followed in ERT I1until the private sector is ready to step in with more substantial debt/equity participation in the initial investment. This will include grid extension investments which were partially financed under ERT I,but which were completed after ERT I closure. Overall, about 109,000 new connections are expected through extension of the main grid. 45 4. Renewable Energy Power Generation. During ERT I,GoU developed its Renewable Energy Policy, which provides the institutional framework for grid-connected renewable energy power generation. In ERT I,there was significant private sector interest in this segment. New investments are likely to be in sugar mill cogeneration, following the success o f the Kakira project in ERT I,and small hydro. ERT I1support in this area will focus on transaction support and any required capacity building. 5. The private sector is expected to raise the necessary equity and debt for project financing. These investments also will have access to the Credit Support Facility if required to attract the necessary debt financing. Inaddition, REA will continue its practice o f considering partial or full financing o f MV interconnections to renewable power generation stations, especially in areas where such lines also will contribute to access expansion. Overall, this component i s expected to lead to the addition o f 30 MW o f renewable energy power generation capacity during ERT I1 implementation. 6. Off-Grid renewable energy investments. This component includes both solar PV for household and institutional consumers as well as independent grid systems. The focus o f ERT I was on institutional sales to rural health, education and water facilities, with limited household sales. During the course o f ERT I,the Photovoltaic Targeted Market Approach (PVTMA) approach was added to facilitate household sales. The proposed project will use a combination of IDA and GEF funds to co-finance sales to households and non-government institutions. Apart from subsidies, the PVTMA approach includes consumer finance for the purchase o f household sales, with the commercial risk taken by the lender. Overall, about 20,000 households are expected to receive solar PV service inERT 11. 7. Independent grids have also experienced difficulties in attracting adequate private sector interest, and where the private sector has come forward, there has been significant delays in reaching financial closure as well as implementation, and also a need for a high level o f subsidies. Thus, the REA intends to follow the same approach as for grid-based rural electrification, with about 2,000 consumers expected to be connected through independent grids. 8. The strategic thrust of PVTMA is based on the observation that business as usual is unlikelyto leadto significant increase inthe numbero fhouseholds electrifiedwith solar PV over the foreseeable future.The key assumption is that inorder to grow the market for household PV systems from a very low base, it will be necessary to target specific market segments using tailored financing options. Inthis context, the term `target' refers to a specific group o f potential users o f solar PV systems. Such a target group could be defined by a region or community, a common characteristic such as a common employer (e.g., Education Service Commission), a common economic activity (e.g., a farmer group), or a social-economic cluster (e.g., a cooperative society or a micro-finance institution). Targeting such a group implies a specific approach can be used to deliver a significant number o f solar PV systems to that particular group through the actions o f a known set o f players. 9. Three specific business models will be usedunder the PVTMA. The first model focuses on providing training and financing to financial institutions, regulated micro-finance institutions (MFIs) and to micro-finance depository institutions (MDIs). Many o f these institutions have already begunworking to provide their clients with access to financing for PV systems. As their 46 reach grows, refinancing will be made available to them through the Credit Support Facility. The secondmodel will involve workingthrough financial institutions and MDIsto target specific regional or market segments in which the institutions already have a significant presence and have a "clustered" market. This cluster may be a geographic market-focusing on a specific rural district-or a specific credit-worthy category of consumers-such as teachers. Inall cases, it will involve addressing a specific targeted group of consumers at the initiative of those consumers and MFIs, and MDIs. The third approach will involve tendering for provision of PV service through a concessionary approach in regions that are not receiving support through the above two approaches. As this approach requires a heavier role for government and will focus on markets not being covered by the first two approaches, it will be adopted only if the first two financing models are not deemed to be making sufficient progress. The private sector remains the preferred avenue through which delivery of solar PV systems occurs, with the government playinga facilitating, coordinating and monitoringrole. 10. The PVTMA represents a deliberate strategy to achieve significant sales of PV systems by focusing on those most likely to want and to be able to finance the purchase of those systems, incontrast to ageneric market development approach.The key features ofthe PVTMA are: (a) Active Assistance by REA. REA will take an active role in not only identifying target markets, structures and players, but also in packaging and monitoring the initiatives. REA will provide financial and human resources, as well as the institutional framework to support PVTMA, including the inspection of installations to ensure that they are completed according to code as well as the provision of consumer subsidies to suppliers according to the terms establishedthrough the various businessmodels. (b) GrassrootsApproach. PVTMA recognizes the importance of grassroots institutions and structures in social and commercial marketing of solar PV, while respecting the need for MFIs to behave in a fiscally responsible manner. Hence partnerships are promoted between the MFIs, NGOs, and CBOs that ensure fiduciary responsibilities are observed. (c) Strengthening Rural Infrastructure. PVTMA takes the view that if strengthened, existing rural solar PV dealers and other non-solar PV enterprises can form an important interface between importers-typically based in Kampala-and users of solar PV located in remote areas. Capacity building and access to capital is, therefore, focused on these rural-based players and encouragingPV wholesalers to develop rural agents and networks. (d) Financial Institutions as Credit and Subsidy Agents. Under the original ERT I arrangements, subsidies were initially available to solar PV companies through PSFU based upon satisfactory inspection of installations. Since the initiation of PVTMA activities in early 2008 (under ERT I), additional financial support has been provided through a limited number of MFI's and MDIs. Efforts are being undertaken to increase the number of MFIs and MDIs working inthe PV market and to buildthe capacity of these additional entities, such as SACCOs, to extend business products linkedto financing of PV systems. (e) Revised Subsidy for PV Consumers. Under the ERT Iprogram, solar PV companies were initially provided through PSFU with a GEF subsidy linked to the size of a PV installation. As part of the adoption of the PVTMA progress, this subsidy (US$l.S/Wp) was continued, but an additional IDA subsidy focused on consumers was initiated. With the PSFU and PVTMA subsidies, the total quantity of the subsidy provided per household PV installation was delivered 47 intwo parts. This was consideredto be inefficient. As part of the transition to PVTMA under ERT 11, only one subsidy-designated for consumers at US$5.5/Wp for households and $4/Wp for institutions whose installation is neither government nor donor-supported-will be administered through REA through the PVTMA program. Inorder to qualify, the registeredPV company must demonstrate on the invoice that the subsidy is being passed along to the final consumer. All installations claiming the subsidy will have to be inspected to ensure that the Uganda quality standards are observed. The registration numbers of the PV panels will be registered and tracked to avoid fraud (with penalties applied for tampering). Once inspections confirm that the installations are satisfactory, REA will process the subsidy payments through the different avenues agreeduponperthe terms of PVTMA. 11. Technical Assistance and Training. This component includes support to REA largely for engineering inpreparation of main grid and independent grid bid packages. Suchengineering support is needed for final site surveys, detailed engineering design, preparation of bills of quantities, etc. Additional consultancy services for PVTMA activities are also included, focused on verification of solar installations which is required prior to release of the subsidy. Consultancy services also will be supported to assist financial institutions, for example in appraisal of ERT investments such as mini-hydro. 12. Credit Support Facility. To facilitate access to local commercial finance, GoU will operationalize the Credit Support Facility (CSF), which was set up in ERT Iunder the Uganda Energy Credit Capitalization Company, Ltd. (UECC), but has not yet started functioning. The UECC will provide credit enhancement products-collective termed the Credit Support Facility-aimed at encouraging the participation of local financial institutions. These will . include a standby liquidity option that effectively extends the loan tenor to more closely match the needs of private investors. Also included will be a partial risk guarantee to address the perceived start-up risks of mini-hydro and other eligible investments. UECC will also operate a refinance facility similar to the ERT Ifacility aimed at supporting solar PV transactions (see Annex 16 for a full discussion of the CSF). 13. Private Sector Foundation Uganda (PSFU). The PSFU will support private sector investors in reaching financial closure or meeting other specific market enhancement targets. PSFU will continue to use the Business Uganda Development Service (BUDSERT) approach from ERT I.However, inERT I1it will focus its efforts much more narrowly on meeting agreed targets using an output basedapproach as muchas possible. 14. Specifically, PSFU will focus on the following areas: business development support to renewable energy project sponsors, aimed at bringingprojects worth at least 10 M W to financial closure; business support to existing non-Umeme distribution concessionaires aimed at connecting at least 5,000 new customers; support to private firms for installation o f energy conserving equipment aimed at saving about 30 M W of peak load capacity; support to the solar PV industry aimed at establishing at least 20 new rural sales outlets for solar products; capacity building for the local business consulting industry aimed at ensuring that at least two transactions are brought to financial close by local consulting firms; and capacity building to the solar PV industry, academia, and the National Bureau of Standards. While the program will remain largely demanddriven, some project targets will requiremore targeted supply driven approach. 48 15. Total Connection Targets. The total number of new connections anticipated by REA during the ERT I1implementation period" is 129,000 (Table 10). This is comprisedof: a) Connections arising from initial electrification, which will include a connection (Stage 1) subsidy aimed at attracting a critical mass of initial customers to support the financial viability of the investment; b) Connections arising from a larger infill (Stage 11) subsidy using the OBA approach outlined above, aimed at connecting poorer households; and c) Solar PV installations, includinghousehold and institutional. Table 10: Uganda ERT I1Indicative HouseholdConnectionTargets I I I I I I CY2013 2,000 5,000 2,000 .9,000 Total 26,000 83,000 20,000 129,000 16. Approximately 52,000 connections are expected to come from main grid and mini-gird schemes implementedby REA under the project which, along with the 20,000 solar PV brings the project total to 72,000 new connections. Hence the additional 57,000 connections are expected to be contributed by other activities financed outside the project by Umeme, GoU funds, private sector, or other donors. Inparticular, Urnemel2is currently indiscussionwith IFC and GoU on support for an extension project which could potentially add about 60,000 new connections. This project would add considerable momentum to the overall GoU access expansion program and would be implemented collaborative through REA to ensure transparency of site selection (in line with the IREMP) and coordination with ERT I1and other initiatives. In addition, the proposed Umeme program would require additional capacity for network design and installation. There may be a need to utilize regional firms for some of this work until Ugandanfirms are able to handlethe increaseddemand for their services. IINote that a four-year project implementation period is planned, but this will extend into portions of 2009 and 2013, hence the five year time frame given here. UMEMEis also supportedby the World Bank through aPartial RiskGuarantee underthe Privatization and Utility Sector Reform Project. 49 Component2: ICT (US$9.2 million-US$ 8.0 million IDA; US$ 1.2 million GoU) 17. The UCC will be responsible for implementing this component. 18. Investment support in ERT I1 will extend the successful efforts o f ERT I.The investments to be financed are: (i)last mile Internet broadband access extension to rural areas with a focus on the Northern region; (ii) community information centers (CICs), including new cell-phone charging facilities, for underserved rural areas; (iii)cell-phone charging facilities for CICs installed in ERT I;(iv) equipment for computer labs to schools and computer equipment for health facilities and subsidized Internet access; and (v) development and dissemination o f tailor-made electronic information packages in local languages for traders, teachers, health workers, and/or farmers. 19. Last Mile BroadbandExtension. Under ERT 11, the ICT component will focus on the provision o f broadband Internet services to rural communities, trading centers, and vanguard institutions in 16 sub-counties. A design study for these broadband services will be undertaken under the bridging financing for ERT activities. The schedule indicating the locations where the service i s required and the definition o f the required services will be finalized after the detailed study has been carried out. 20. The last mile broadband extension will be implemented and the services provided by private telecommunications operators, in return for capital subsidies awarded through a competitive tender. The tender will be based on least-cost subsidyprinciple and will be designed following the OBA approach. The project will be technologically neutral in order to allow competition and to ensure the implementation o fthe optimal solution. 21. Under the terms o f the subsidy and service agreement, the selected operator(s) will also be required to provide public Internet access points with at least three computers (users will be charged according to prevailing market rates) and subsidized Internet access to one school and one health centre in each o f the 16 sub-counties (free for the first year and subsidized tariffs for the second year). Inaddition, the successful operators will be requiredto provide basic training for maintenance to build capacity for trouble-shooting at the district level. Details will be elaborated in the bidding documents. While the last mile extension will focus on the Northern region, viability and sustainability of the provided services may dictate the inclusion o f other regions. 22. The parallel National Transmission Backbone project has been undertaken by the GoU with assistance from the Chinese government. The project's main objective is to connect 28 of the major district municipalities to the capital by high speed fiber optic cable connection for a total lengtho f 2,117km. The selected operator(s) implementing the last mile broadband services will have an option o f connecting to the national transmission backbone or using their own backhaul approach. 23. Community Information Centers (CICs). The construction of the telephony network inthe 154 underserved sub-counties, including the deployment of 1,533 pay phones under ERT I,wascompletedinJuly2008. However, somesub-countiesintheruralareasstillhaveno telephone network. Therefore, 550 additional CICs will be established countrywide under ERT I1to fill the gap. The new CICs will also include battery charging facilities for mobile phones 50 and rechargeable lamps for the public in areas where grid power is not available. The schedule indicating the locations in the underserved sub-counties and parishes will be availed after consulting with the operators about their roll out plans. A small study will be carried out to profile the specific locations that do not have telecommunication services, with an emphasis on Northern Uganda. As in Phase I,the CICs will be implemented and the services provided by private telecommunications operators in return for capital subsidies awarded through a competitive tender. The tender will be based on least-cost subsidy principles and will be designed following the Output-Based Aid (OBA) approach. 24. Charging Facilities for CICs. MTN (U) Ltd. was awarded, through competitive tenders, contracts to provide 1,533 CICs under ERT I.UCC will request MTN to assess the availability of grid power at Phase Isites. CICs that are outside the electricity grid network area will be provided with power from the most efficient and appropriate (preferably renewable) sources such as solar energy. These CICs will be retrofitted with battery charging facilities for fee-based public recharging o f mobile phones and rechargeable lamps. The set up i s to include batteries and a variety o f phone chargers as well as extension cables for charging lamps for use inhomes. UCC and MTNwill negotiate a cost sharing formula for the investment necessary to set-up the charging facilities. 25. Schools and Health Facilities. UCC will provide subsidized Internet access to some schools and health centers (free for the first year and subsidized tariffs for the second year). UCC will provide equipment for computer labs including free maintenance for three years to at least 35 schools and computer equipment for 30 health facilities. The schools and health facilities will be selected primarily in areas where broadband services become available under ERT 11. For health centers located outside the ERT targeted 16 sub-counties, one year o f free internet access will also be provided. Details will be elaborated inthe biddingdocument. 26. Content Development.The ICT investments are only a conduit, while the information content delivered by the ICT hardware actually creates development impact. Therefore, UCC will develop appropriate content for traders, teachers, health workers, and fanners. The content will be invarious local languages and will be tailored to the needs o fthe local communities. The content could be disseminated to targeted population using the most efficient and accessible channels, including Internet, mobile phones (e.g. an SMS platform) and/or community radio. Owing to the low educational levels inthe rural areas, the Internet and SMS distribution channels may need to be enhanced by electronic blackboards to transmit information locally for the most critical market information. In addition, trainers will train other users to access this content as well as general use o f ICT services. This work is aimed at increased and sustainable usage o f ICT services and hence improvement inthe utilization o f ICT facilities set up under ERT Iand I1 and other initiatives. 27. The content may include daily market information such as prices and stocks of produce countrywide, a database o f suppliers o f farm implements and seeds, a list o f buyers o f farm produce, health and sanitary information, educational information such as academic material or a database o f schools colleges and universities, early warning systems, etc. MAAIF and National Agriculture and Advisory Services (NAADS) will be consulted in the case o f agriculture information, and other relevant stakeholder will also be consulted. 51 28. Specialized firms will Be hired to develop local content and build capacity for the development and maintenance o f content. 29. Technical Assistance, Training. This component will also include support to UCC in the form of consultancy services for the detailed design and implementation of the investments financed by the project and training for UCC staff. Component 3: Energy Development, Cross Sectoral Links, Impact Monitoring (US$ 30.4 million-US$26.0 million IDA; US$3.3 million GEF; US$ 1.1 million GoU) 30. This component will be implemented by the cross-sectoral ministries(Health, Education, Water, and Agriculture), MEMD, MOPFED, and the Ministryo f Local Government. 31. Given that the implementation rate o f the cross-sectoral agencies varied significantly in ERTI,it has been decided to provide each sector with a base allocation of funds, with additional funds to be kept inan unallocated pool from which sectors with a faster implementation rate can draw without a need for reallocation. The health and water sectors performed well in ERT I,and their plans are to extend the same approach to other areas. The education sector did not get started with procuring energy packages for rural schools until late into ERT Iimplementation. The procurement process has now started, and it is anticipated that installation will be at least 80 percent complete in ERT I.13The recent steep positive gradient o f the education sector's performance bodes well for ERT 11. However, the base levels o f funds allocated in ERT I1 are low inview o f the past performance. HealthSector 32. The overall goal for the health component i s to improve delivery o f health services in rural health centers through increased access to modern energy services and ICTs. The activities in ERT I1will build on the achievements of the ERT Iby increasing investments in modern energy services in rural health centers for improved health services delivery. This will be through use o f solar PV systems or connection to a reliable grid. Twenty four districts will be covered inERT 11. 33. The specific objectives for ERT I1will be to: a) Increase investments and accelerate implementation o f the developed standard s o h PV energy packages inall Health Centers (HC) level IV not connected to the grid and 75 percent o f the H C levels I1 and 111. In lower level health facilities, both the medical buildings and staff houses will be covered. b) Connect all HCs within 500 meters of the national grid and up to 1Kmfor HC level IVS. 34. Use o f solar energy systems remains the most feasible option in the short term to provide modern energy services in rural HCs. The standard solar PV energy packages developed in Phase Iwill form the basis for accelerated electrification o f HCs in the selected districts for Phase 11. 13The balance will be financed under ERT 11. 52 35. Private companies will supply, install and maintain the solar energy packages through signed maintenance contracts with the MoH/Districts. The maintenance contract will have specific requirements relating to establishment o f a district based branch to carry out routine maintenance, stock spare parts and train users and local technicians. For users, training will be carried out on the operation, care, handling and management o f solar systems. 36. For ERT 11, Northern Uganda will be given special consideration so as to contribute to the Northern Uganda Recovery Program. Nonetheless, regional balance, equitable distribution andoptimization of loan utilization will be critical issues while selecting beneficiary districts and HCs. 37. The Health Sector Strategic Plan I1(HSSPII) emphasizes implementation o f the National MinimumHealth Care Package (NMHCP) as the cornerstone for improved Primary Health Care (PHC). Inthis respect, the following core healthcare services will be targeted inERT 11: a) Reproductive Health services with particular emphasis to contributing to better emergency obstetric care; b) Immunization services; c) Basic diagnostic services; and d) Healtheducation 38. Inorder to achieve these objectives, ERT I1will focus on providing the following basic energy services: a) Lighting (for both medical buildings & staffhouses); b) Vaccine refrigerationat H C 11, I11& IV; c) Blood refrigeration at H C IV; d) Microscopy at H C I11& IV; e) Health education, communication and data management; and f) Water pumpingand solar water heating Water Sector 39. The overall objective of the water component is to assist Ministry of Water and Environment in improving the water supply services, in particular for the rural growth centers and small towns mechanized systems, by providing the least cost energy solutions to the communities where water schemes have been or are to be installed. The Directorate o f Water Development (DWD) i s responsible for implementingthe ERTwater component. 40. The main benefit to be derived from the project is rationalized energy inputs for water supply systems. The other benefits linked to the intervention for appropriate renewable energy for water supplies include: 53 Increasedwater coverage; Reduced cost of installation for energy investment, which frees funds for more schemes; Reduced O&M energy cost of water supply services and lower tariffs; Fewer new point sources required for pumped piped schemes with reticulation and more efficient utilizationof capital resources; A cleaner environment andimprovedhealth; Shorter walking distances, which save energy and time; and Contribute to poverty reduction due to increased productivity and better quality of life. 41. ERT Iinvestment in energy packages for water supply demonstrated the practicality, performance and viability of energy packages for water supply schemes. The investments in energy packages showed tangible results on the ground and formed a strong basis for replication and scaling-up during ERT 11. The scope of investment in energy packages for ERT I1 will target an additional 16-20 water supply schemes. The schemes will be largely in the North, in line with GoU's Peace and Recovery Development Programme (PRDP), and in remote areas off the grid. 42. The schemes will be selected, inaddition to the above, basedon the following: Schemes located off-grid connectiodnetwork and not anticipated to be coveredby the grid innext five to 10 years; Schemes under construction or completed, thus accommodating the installation of energy packages; Focus on use o f renewable energy packages solar PV14as appropriate; Schemes with confirmed water sources with drilled production wells and available data on yields, installation of pump, energy, reservoir and distribution systems; and The pilot centers selected to comprise of small, medium and large capacity schemes interms ofwater demand levels andpower requirements. 43. An estimated95,000 people are expectedto benefitfrom improved pumpedwater supply systems installed with ERT packages investments under ERT 11. These are people inremote rural areas without access to grid power for pumped water schemes. An average per capita cost is estimated about US$42 for the energy package for water supply system. However, the average cost for O&M is expected to be reduced by about 30-50 percent due to the simpler requirements of PV over a conventional diesel power system. 14Wind pumps may also be deployed ifissues such as the vandalism experiencedby earlier (non-ERT) investments can be addressed. 54 EducationSector 44. The objective o f the education component is to improve the quality of education in 40 districts by providing access to energy and ICT to post-primary education institutions including staff houses. This will assist MOES to reach its goals o f expanding opportunities for and access to post-primary education. Furthermore, policy guidelines for energy/ICT in post-primary education will be developed. Education sector financing will include completion of the funding for the energy package which was partially funded under ERT Ibut which was completed after ERTIclosure. 45. The MoES will be responsible for the implementation o f a number o f activities withinthe component. The major activities o f the component are: a) Needs Assessment of Schools in the 40 Districts. The results o f this needs assessment will provide information on the number o f schools that deserve to benefit from ERT Phase 11, their sizes, distances between schools and their energy requirements. b) District Workshops. In order to raise awareness about the energy/ICT packages, sensitization activities in all the 40 districts will be implemented in ERT I1when they are due. Four regional workshops will be held inthe selected districts, for which MoES will be responsible incollaboration with other stake holders. c) CapacityBuilding.Capacity buildingwill especially concern the ERT team inMoES andthe district ERTteam, andwill focus on the purpose and benefitof energy and ICT in the education sector. This is a pre-requisite for understanding the ERT program opportunities for the sector and the target population. d) Energy Packages. Procurement will be the responsibility of MoES, which will prepare tenders according to WB standard biddingdocuments and based on the eligibility assessment o f the post-primary education institutions in the district. The installation and maintenance o f energy/ICT packages will be done at the schools' cost. MoES will handle the entire procurement process for goods and services, including preparation of tender documents, examination o f bids, approval and award o f supply contracts etc. However, the district will also be responsible for supervision o f the suppliers and through the CAOs report back to MoES on supplier performance biannual supervision reports. MoES will issue guidelines for these reports. Contracts o f suppliers who do not conform to the terms and guidelines issuedby MoES will be terminated. AgricultureSector 46. The overall objective o f the agriculture component o f the ERT program is to support the Plan for Modernization o f Agriculture (PMA) process o f transforming agriculture from largely subsistence to commercial through the use o f energy/ICT inagricultural activities so as to: a) Increase incomes by raising farm productivity o f rural enterprises through use of energy and ICT; b) Raise the share o f agriculture that can be marketed through increased agro-processing and post-harvestmanagement; 55 c) Create on farm and off-fann employment through the investment opportunities that arise with access to energy/ICT; and d) Improve communication and information flow, especially in the marketing of agricultural products for which ICT and energy access will play a crucial role. 47. The major areas of focus are: a) Agro processingand value addition for crops, livestock and fish; b) Livestock development e.g. cooling and sanitation facilities for milk, beef, and poultry, vaccines etc.; c) Fishing, e.g. electricity for fish processing, sanitation, and power to the fish landing sites; d) Post-harvestlossesmanagement, e.g. storage facilities andprimary processing; e) Power for irrigation, e.g. water for agricultural production for crops, livestock and fish; and f) ICT access for marketing, information, etc. 48. The major activities to be undertakenare shown below. The bulkofthe budget will be for agricultural investment subsidies, which will be administered by REA. The ministry's role will be to identifythe target beneficiaries. a) Technical assistance-implementation support b) Training and capacity building activities c) Subsidies for agricultural investments (administered by REA) d) Districtworkshops e) Monitoring and evaluation f) Developing informationpackages Ministry of Energyand MineralsDevelopment 49. Energy Efficiency. MEMD is currently finalizing an Energy Efficiency Strategy for Uganda, with assistance from GTZ and informal support from the Bank project team. ERT I1 will selectively support activities consideredto be cornerstonesof the draft strategy. These may include: energy efficient street lights, energy efficiency in large industrial/commercial facilities, promotion of energy efficient appliances, energy efficiency in SMEs, and solar water heaters. It i s expected that these will help develop the institutional framework for energy efficiency, to be followed by scale up inERT 111. 50. Gasification. Under ERT I,MEMD installed gasifiers in pilot locations. These were completed late in ERT Iand the next step-to be completed under ERT II-is to assess this 56 experience and identify next steps. Depending on the outcome, additional work on this area may be supported out o fthe pooled funds. 51. Renewable Energy Database. Under ERT I,a GIs-based database was prepared and populated with existing renewable energy information. Under ERT 11, MEMD will assess the status o f renewable energy data and undertake primary research in one or more targeted areas. The first area o f focus will be micro-hydro, for which a national census o f available sites i s needed. 52. Capacity Building, DED Support. In view o f its evolving needs, MEMD will undertake an assessment to identify key capacity gaps and emerging requirements. Targeted capacity building will be supported by the project. Inaddition, GoU i s negotiating with DED for technical advisors in support o f key development objectives. The sustaining costs o f these advisors will be supported under ERT 11. 53. HIV/AIDS Awareness. In accordance with its standard procedures, MEMD will undertakeHIV/AIDS awareness activities underthe project. Ministry of Finance 54. Under ERT I,MoFPED's Poverty Monitoring Unit undertook to assess the impact of electricity service on poverty outcomes. Utilizing pre- and post-installation survey instruments as well as control groups, the effort was intended to identify specific indicators that could be usedto effectively track the on-the-ground impact o f electrification investments. However, due to slow progress on electrification investments, MoFPED was unable to complete this work under ERT I.Hence this assignment will be extended and enhanced inERT 11. Once indicators are identified, MoFPED will undertake the impact monitoring inaccordance with its mandate. Ministry of Local Government 55. In ERT I,MoLG led a campaign o f extensive district-level sensitization, aimed at spreading awareness o f the GoU's new approach to access expansion. Under ERT 11, MoLG will focus on using its unique position, network, and capabilities to enhance the uptake o f electricity and ICT usage. Specifically, MoLG will focus on service uptake by local government institutions, and also on enhancing the role o f local governments in the planning and implementationo f energy and ICT investments. 57 Annex 5: ProjectCosts UGANDA: Energy for RuralTransformationI1 IDA GEF GoU TOTAL Project Cost By Component and/or Activity 1-1Publicly FundedGrid Related Power Supply 26.6 6.7 33.3 1.2 Off-Grid RenewableEnergy Investments 7.4 2.2 9.6 1.3 Technical Assistance, Training 1.5 1.5 1.4 Credit Support Facility 3.5 3.3 6.8 1.5 Private Sector Foundation Uganda 2.0 0.2 2.2 Component 2: InformationCommunications Technologies(ICT) 2.1 Investments 7.4 1.1 8.5 2.2 Technical Assistance, Training 0.6 0.1 0.7 Component 3: EnergyDevelopment,Cross SectoralLinks,ImpactMonitoring - 3.1 Energy Packages 20.0 2.1 1.1 23.2 3.2 Technical Assistance, Training, Operating Costs 6.0 1.2 7.2 Total 75.0 9.0 9.0 93.0 Project Cost By Component and/or Activity Local Foreign Total US$million U S $million US $million Component 1: Rural Energy Infrastructure 1.1 Publicly Funded Grid Related Power Supply 6.8 26.5 33.3 1.2 Off-Grid Renewable Energy Investments 9.6 9.6 1.3 Technical Assistance, Training, Operating Costs 1.5 1.5 1.4 Credit Support Facility 6.8 6.8 1.5 Private Sector Foundation Uganda 1.2 1.o 2.2 Component 2: InformationCommunications Technologies (ICT) 2.1 Investments 0.3 8.2 8.5 2.2 Technical Assistance, Training, Operating Costs 0.7 0.7 Component 3: Energy Development, Cross Sectoral Links, Impact Monitoring 3.1 Energy Packages 23.2 23.2 3.2 Technical Assistance, Training, Operating Costs 7.2 7.2 Total Baseline Cost 93.O Total ProiectCosts' 8.3 84.7 93.0 TotalFinancingRequired 8.3 84.7 93.O 58 Annex 6: ImplementationArrangements UGANDA: Energyfor RuralTransformationI1 1. Implementation arrangement will be very similar to ERT Iin which each stakeholder took primary responsibility for their respective aspects of the program under the overall coordination of the Ministry of Energy and Mineral Developments. 2. Specifically, MEMD will retain a Project Coordination Unit which will be responsible for: e Ensuring consistency of the project with policy, regulations, and procedures of Government, the World Bank, the Parliament and other key stakeholders. e Coordinating all the implementation of all the components includingMEMD, including: o Progressmonitoringof eachcomponent o Identification of opportunities for collaboratiodsynergy among project stakeholders and seekingto operationalize them o Identifyingproblems andbottlenecks and proactive seekingto address them o Maintaininga focus on project objectives and assisting stakeholdersto re-align as neededto better achieve objectives o assess project `soft costs' to ensure they are well aligned with ERT I1Objectives and contribute to results as measuredby the ResultsFramework e Enhancing participation of all project stakeholders including arranging for regular coordination meetings with the implementing agencies with the purposes of monitoring and evaluation of the project progress. e Preparing and regularly update budgets with the implementing agencies e Preparing quarterly and annual progress reports for submissionto the World Bank, Office ofthe Prime Minister, MoFPED, e Preparingthe quarterly InterimFinancial Reports (IFRs) for the PCU designated account. e Preparing the quarterly report for the entire project, incorporating inputs from other Designated Account holders as well as all the implementing components under its financial jurisdiction. e Arranging for the financial audits of the components. e Undertaking appropriate communication activities for external audiences, including preparation of a biannual newsletter, about the progress of the project. e Preparing and regularly update a consolidated procurement plan for submission to the World Bank and other stakeholders. e Monitoring the progress of all the procurementsto ensure compliance and timeliness. e Preparing regular financial projections and financial monitoring of the investments. 59 3. As with ERT I,each implementingagency will retain responsibility for their respective activities, including procurement, installation, monitoring, and evaluation as appropriate. They also will be responsible for financial management either o f their Designated Account or their Sub Account, and providing necessary inputs to IFRs and other project reports. Designated Accounts will be established as per Annex 7. 4. Also as in ERTI, ImplementingAgencies under ERT I1will be expected to continue and evenexpand collaboration among themselves and with other relevant programs and initiatives to maximize both the impact o f the project and the benefit to the country. SupervisionPlan 5. Supervision o f this project will build upon the experience inPhase I.The Kampala Bank office has a locally recruited Power Engineer who has been available for day-to-day supervision activities under the supervision o f the headquarters based Task Team Leader. In addition, the field based procurement, financial management, social, and environmental specialists have provided quick response service intheir respective areas o f expertise. These include weekly, and at times daily, interaction with the project stakeholders to identify and address emerging issues. There are future plans to recruit a field based internationally recruited Energy Specialist who will further bolster supervision efforts. Task Team Leadership o f this project is expected to shift to the field office. Headquarters and other international staff will continue to participate in supervision to ensure adequate support and oversight o f areas such as GEF focus areas, ICT, business development services, and the Credit Support Facility. 6. The supervision team will interact with the Project Coordination Unit as the primary point o f contact. However as needed the team also will interact with other project stakeholders, especially to ensure smooth implementation o f project investments and to address emerging project issues. The project includes sufficient consultancy support, for example to REA on design and packaging o f the rural electrification packages and to the cross sectoral ministriesfor design and implementation. Inspection for verification o f solar installations is also included in project activities under REA. The Task Team will utilize the reports and other outputs from these project supported activities to facilitate the supervision process. 60 Annex 7: FinancialManagementand DisbursementArrangements UGANDA: Uganda:Energy for RuralTransformationI1 ExecutiveSummary 1. This annex records the results of the assessment o f the proposed public financial management (PFM) arrangements for Energy for Rural Transformation Project Phase I1(ERT 11) implemented by 11 direct participating institutions: Uganda Communications Commission (UCC), Private Sector Foundation Uganda (PSFU), Rural Electrification Agency (REA), Ministry o f Energy and Mineral Development (MEMD), Ministry o f Finance, Planning and Economic Development (MoFPED), Ministry o f Local Government (MOLG), Ministry o f Health (MOH), Ministry o f Education and Sports (MoES), Ministry o f Agriculture, Animal Industry and Fisheries (MAAIF) and Ministry of Water (MOW), and the Uganda Energy Credit Capitalization Company Ltd. (UECC). The Project Coordination Unit will be based at the MEMDandwill oversee project implementation. 2. The objective of the assessment i s to determine: (a) whether the participating institutions have the adequate financial management arrangements to ensure that ERT I1funds will be used for purposes intended in an efficient and economical way; (b) ERT I1 financial reports will be prepared in an accurate, reliable and timely manner; and (c) the entities' assets will be safeguarded. The financial management assessment was carried out in accordance with the Financial Management Practices Manual issued by the Financial Management Sector Board on November 3,2005. 3. The project's financial management transactions will be managed within the existing set- up in the participating institutions, wherein overall accounting officers are the permanent secretary (PS) for the ministries and chief executive officers (CEOs) for other institutions. The institutions' accounting departments are adequately staffed with principal accountants as head (for the ministries) and finance directors (for other institutions), senior accountants, accountants and several accounts assistants. For the ministries, the PASreport to the undersecretaries who also report to the PSs, while for the other institutions the finance directors report to the CEOs. 4. The participating institutions have accounting policies and procedures that will be used for the project. The institutions are computerized with various accounting packages, with the exception o f the PCU that i s yet to computerize. The ministries are also computerized with Integrated Financial Management Information System (IFMIS). However the IFMIS has not yet been configured to be utilized by projects, which implies that ERT I1accounting will be done using other parallel accounting software or Excel spreadsheets. The institutions have internal audit units comprised o f heads o f internal audit and internal auditors who will include the project activities in their work plan. The project's financial statements will be audited in accordance with statutory requirements, and suitable terms of reference acceptable to IDA will be developed. 5. Actions outlined in the Financial Management Action Plan will be undertaken by the respective institutions to strengthen financial management systems in order to fulfill the three objectives outlined above. It will be important for the preparation team within the respective ministries to liaise with the Accountant General's Office to ensure that a project module is created within the IFMIS such that ERT I1 accounts can be prepared using the existing 61 computerized accounting system. It will also be important to formulate and integrate the project's chart of accounts within the mainstream government codes. 6. Inorder to ensure that the project is effectively implemented,the institutions will ensure that appropriate staffing arrangements are maintained throughout the life of the project. 7. The conclusion of the assessment is that the proposed financial management arrangements for the project are adequate and meet the World Bank's minimumrequirements as stipulated in OP/BP10.02 and by the Financial Management Practices Manual. The project's overall financial management risk rating before mitigation is substantial and is considered moderate after mitigation. With the implementation of the action plan, the financial management arrangementswill be strengthened. Country Issues 8. The Public Expenditure and Financial Accountability (PEFA) report of November 2005 (issued in July 2006) and Country Financial Accountability Assessment (CFAA) carried out by IDA in 2004 shows that Government of Uganda has made substantial progress in improving PFM systems since the last CFAA undertakenin 2001. The fiduciary risks associated with poor budget formulation and budget preparation processeshave beenreduced. Interms of appropriate legislation and regulatory frameworks, significant progress has beenmade to ensure that the risk associated with the lack of clear rules and regulations has been reduced. Also, more useful information is provided in the Report and Opinion of the Auditor General to Parliament on the public accounts, which are upto date. 9. However, risks remain in terms of: (i)quality and timeliness of in-year budget reports, which only include information on budget releases and not actual expenditures; (ii)stock and monitoring of expenditure payment arrears; (iii) effectiveness of internal audit; (iv) oversight of aggregate fiscal risk from other public sector entities; (v) effectiveness of taxpayer registration, assessment and collection; (vi) legislative scrutiny of external audit reports; and (vii) effectiveness of payroll controls. 10. GoU has prepared a Financial Management Accountability Program (FINMAP) to address the weaknesses in its PFM system. The FINMAP is supported by a number of development partners (including the World Bank) that form the Public Financial Management Donor Group. RiskAssessment and Mitigation 11. The objectives ofthe project's financial managementsystem are to: Ensure that funds are used only for their intended purposes in an efficient and economical way; 0 Ensurethat funds are properly managedand flow smoothly, adequately, regularly and predictably inorder to meet the objectives of the project; Enablethe preparation of accurate and timely financial reports; Enable project management to monitor the efficient implementation o f the project; and Safeguard project assets and resources. 12. Furthermore, the following are necessary features o f a strong financial management system: e An adequatenumberand mix of skilledand experienced staff; e Internal control system that ensure the conduct o f an orderly and efficient payment and procurement process, and proper recording and safeguarding o f assets and resources; e An accounting system that supports the project's requests for funding and meets its reporting obligations to fund providers, including GoU, IDA, other donors, and local communities; e A system capable of providing financial data to measure performance when linked to the output ofthe project; and e An independent, qualified auditor appointed to review the project's financial statements and internal controls. 13. The table below identifies the key risks that the project management may face in achieving these objectives, and provides a basis for determining how management should address these risks. Table 12: Financial Management RiskAssessment Matrix Risk Risk RiskMitigating Measures Riskrating Conditionof Rating Incorporatedinto Project after Negotiations, Design mitigation Effectiveness I I I I I0 hherent Risk Country Level-The Weaknesses such as accounting 2005 PEFA report S capacity, budget classification,payroll M identified rules and procurement compliance are weaknesses in beingmitigatedunder a government government PFM PFM reformprogramcalledFJNMAP. systems Entity Level-Line A PCUwill be in place at MEMD to ministriesinvolved coordinate all line ministries' activities could delay in M for prompt reporting.The Auditor L submittingrelevant General's report of 30thJune 2007 did reports due to weak not raise any materialissues under the capacity ministries. 63 Riskrating :ondition of tfter Vegotiations, mitigation Effectiveness Y/N) ProjectLevel- It is a This will be mitigatedby accountability complex project instructionsissuedby MEMD spelling implemented by 11 out duties and responsibilitiestogether participating S with staff specifically assignedto the M institutionsincluding project.The Energy Department in the ministries, private parent ministry will ensureproper sector, autonomous coordination. organizations and communities, and is hence difficult to monitor OverallInherent Risk !lode rate ControlRisk lisk Rating Budgetingand AccountinP Although all Bank ERT I1accounts will be prepared funded projectsare manually usingExcel spreadsheets in captured under the S line ministries, giventhe low levelof M annual budget, the transactions inthose departmentswhile government the MEMD PCUwill consolidate using accounting system accountingsoftware. This will further bc does not record mitigatedinthe future by MoFPED projecttransactions creatinga projectmodulewithin the IFMIS to be used for project accounting in ministries. Accountingsystems are satisfactoryis all the other participating institutions Internal S The participatinginstitutionshave M Control-Inabilityto qualifiedandexperienced internal follow up reported auditorswho will includethe project internalcontrol within their work planto ensure the weaknesses. internal audit unit carries out its role within the project. This will be spelled out intheir accountability instructions. The participatinginstitutionshave 'es- condition of Reporting-Financial M produced formats of unaudited interim L !egotiation informationmay be financialreports (IFRs) that will be used fulfilled) late and unreliable for ERT11. The accountability for preparing instructionswill also enhancethe requiredreports reportingtime line for ministries. 64 H-High S - Substantial M-Moderate L-Low The overall residualrisk is expectedto be moderateuponmeetingthe conditions inthe risk assessment and mitigationtable above. Strengthsof the ProjectCoordinationUnit 14. The strengths o f the project financial management are: 0 The accounting personnel within the participating institutionsare adequately qualified and experienced; The project under the ministries will use the Treasury Accounting Instructions 2003, issued under the Public Finance and Accountability Act 2003 as its accounting policies and procedures; 0 Budgetingarrangements are adequate and strong; 0 , External and internal auditing arrangements are adequate; 0 Fundsflow arrangements are adequate; and 0 The participating institutions have adequate financial reportingrequirements. 15. The weaknesses of the project financial management are: The participating ministries will prepare their accounts using other accounting software and/or Excel spreadsheets, despite having the IFMIS in place, since IFMIS i s not configured to handle project accounts. This issue should be addressed within one year after project effectiveness. At the PCU the accounts are maintained manually by spreadsheets, instead of with more appropriate accounting software. Institutionaland ImplementationArrangements 16. ERT 11's PCU will be based inthe MEMD.The structure and budget o f the PCU is part o f the MEMD plan. This unit was initially not part of ERT Ibut during implementation it was found necessary, as coordinating the multi-sectoral project could not be efficiently handled within the ministry structures. The PCU will be retained as a small unit utilizing MEMD resources to a large extent (procurement unit and procedures, accounting system, etc.), and it will beresponsible for reporting and coordinating line ministries' activities implementingthis project. 65 17. ERT I1will require five designated accounts. These will be held by the UCC, the PCU, PSFU, the REA", and the UECC when it becomes operational. To allow REA to concentrate on its core mandate o f accelerating access to modern energy services, the designated account under the PCUwill handle MEMDandthe participatingline ministries. 18. During project execution the `implementing institutions will individually coordinate implementation o f their respective activities and manage: a) Procurement, including purchases of goods, works, and consulting services; b) Project monitoring, reporting and evaluation; c) Contractual relationships with IDA and other co-financiers; and d) Financialmanagement and record keeping, accounts and disbursements. 19. The ministry PSs and CEOs o f other institutions will be the project accounting officers, with overall responsibility for accounting for project funds. 20. The Credit Support Facility is not yet operational. This will be accomplished early in ERT I1implementation. A condition of disbursement to the UECC will be that it puts inplace adequate staffing, operational procedures, etc. such that it meets IDA requirements. 21. Financial management arrangements for the four directly participating entities are as follows: PrivateSector FoundationUganda(PSFU) Budgeting: 22. Individual departments are involved in the budgeting process. The finance department provides the necessary support during budget preparation process. PSFU budget procedures are followed while developing budgets. Management reviews budgets and submits them to the board for approval. The capacity o f the accounting staff to fulfill budgetingneeds o f the project i s adequate Accounting: 23. PSFU will maintain similar books o f accounts to those for other IDA-fundedprojects. The books o f accounts to be maintained specifically for ERT I1 should include: a cash book, ledgers, journal vouchers, fixed asset register and a contracts register. The existing chart o f accounts allows project costs to be directly related to specific project work activities and outputs. StaffingArrangements: 24. PSFU is adequately staffed with qualified and experienced accounting staff. Accounting i s done by four staff headed by the director finance who reports to the Executive Director. PSFU has one finance director, two accountants, and one accountant assistant. ''The PCUis under MEMD, and REA is an agency establishedunder MEMD. HenceMEMD will havetwo designatedaccounts. The PS MEMD, acting inhis capacity as ChiefAccountingOfficer for the ministry,will providean authorization for REA to open the second designatedaccount. 66 InformationSystems: 25. PSF uses Sun Systems computerized accounting software. This package i s capable o f producing project financial reports instantly and will be used to produce reports for this project. The staff is well trained to use this software. The system also safeguards the confidentiality, integrity and availability o f data InternalControls and Audit: 26. PSFU has a financial management manual that describes the accounting system. This system includes: major transaction cycles o f the project; funds flow processes; accounting records, supporting documents, computer files and specific accounts in the financial statements involved in the processing of transactions; the chart o f accounts; the accounting processes from the initiation o f a transaction to its inclusion inthe financial statements; authorization procedures for transactions; the financial reporting process used to prepare the financial statements, including significant accounting estimates and disclosures; financial and accounting policies for the project; budgeting procedures; financial forecasting procedures; and procurement and contract administration monitoring procedures. 27. PSFU has a qualified and experienced internal auditor who reports to the CEO and the board. The internal auditor issues reports based on her review o f the internal control system o f the organization, and management takes action on the recommendations. The internal audit arrangements at PSFU are adequate. UgandaCommunicationCommission (UCC) Budgeting: 28. Individual departments are involved in the budgeting process. Finance department provides the necessary support during budget preparation process. UCC budget procedures are followed while developing budgets. Management reviews budgets and submits them to the board for approval. The capacity o f the accounting staff to fulfill budgeting needs o f the project is adequate. Accounting: 29. UCC will maintain similar books o f accounts to those for other IDA funded projects. The books o f accounts to be maintained specifically for ERT I1should include: a cash book, ledgers, journal vouchers, fixed asset register and a contracts register. The existing chart o f accounts allows project costs to be directly related to specific work activities and outputs o f the project. StaffingArrangements: 30. UCC i s adequately staffed with qualified and experienced accounting staff. The department is composed o f nine staff headed by the finance director who reports to the executive director. The assistant finance director i s not yet filled but due to be filled early 2009. InformationSystems: 31. UCC uses Navision computerized accounting software. This package i s capable o f producing project financial reports instantly and will be used to produce reports for this project. 67 The staff i s well trained to use this software. The system also safeguards the confidentiality, integrity and availability o f data. Internal Controlsand Audit: 32. UCC has a finance and accounting regulations manual that describes the accounting system. The system includes: major transaction cycles o f the project; funds flow processes; the accounting records, supporting documents, computer files and specific accounts in the financial statements involved in the processing o f transactions; the chart o f accounts; the accounting processes from the initiation o f a transaction to its inclusion in the financial statements; authorization procedures for transactions; the financial reporting process used to prepare the financial statements, including significant accounting estimates and disclosures; financial and accounting policies for the project; budgetingprocedures; and financial forecasting procedures. Rural ElectrificationAgency (REA) Budgeting: 33. Individual departments are involved in the budgeting process. Finance department provides the necessary support during budget preparation process. REA budget procedures are followed while developing budgets. Management reviews budgets and submits them to the board for approval. The capacity o f the accounting staff to fulfill budgetingneeds o f the project i s adequate. Accounting: 34. REA will maintain similar books o f accounts to those for other IDA-fundedprojects. The books o f accounts to be maintained specifically for ERT I1 should include: a cash book, ledgers, journal vouchers, fixed asset register and a contracts register. The existing chart o f accounts allows project costs to be directly related to specific work activities and outputs o f the project. StaffingArrangements: 35. REA has three accounting staff: the finance manager, accountant and assistant accountant. This can be considered adequate, InformationSystems: 36. REA uses Sun Systems computerized accounting software. This package is capable of producing project financial reports instantly and will be used to produce reports for this project. The staff is well trained to use this software. The system also safeguards the confidentiality, integrity and availability o f data. Internal Controlsand Audit: 37. REA has an accounting, financial reporting and administration systems' financial management manual that describes the accounting system. The system includes: major transaction cycles o f the project; funds flow processes; the accounting records, supporting documents, computer files and specific accounts in the financial statements involved in the processing o f transactions; the chart o f accounts; the accounting processes from the initiation o f a transaction to its inclusion in the financial statements; authorization procedures for transactions; 68 the financial reporting process used to prepare the financial statements, including significant accounting estimates and disclosures; financial and accounting policies for the project; budgeting procedures; financial forecasting procedures; procurement and contract administration monitoring procedures. 38. REA has a qualified and experienced internal auditor who reports to the board through the executive director. The internal auditor issues reports based on the review o f the internal control system of the organization and management takes action on the recommendations. Ministry of Energyand MineralDevelopment(MEMD) Budgeting: 39. Government planning and budgeting procedures which are documented in the government's Treasury Accounting Instructions, 2003 are followed. These arrangements have been found to be adequate. There i s also a planning unit responsible for budgeting in each ministry. All other departments are involved in the budgeting process. The capacity o f the accounting staff to fulfill budgeting needs o f the project i s adequate. Overall, Bank-funded projects are integrated inthe national budget. Accounting: 40. The ministries will maintain similar books o f accounts to those for other IDA funded projects. The books o f accounts to be maintained specifically for ERT I1 should include: a cash book, ledgers,journal vouchers, fixed asset register and a contracts register. StaffingArrangements: 41. The ministry's PCU is adequately staffed with qualified and experienced accounting staff. The PCU has one project accountant and one assistant accountant. These designated staff will report to the project coordinator who will report to the permanent secretary. Given that the beneficiary line ministries will be consolidating and reporting through the PCU, there will be need to strengthen and build capacity o f the PCU in order for them to handle the seven beneficiary ministries. The current staffing levels will not be able to handle financial management needs o f all the other ministries and will require an extra accountant. InformationSystems: 42. The PCUdoes not use any computerized accounting software. The books are maintained on a manual system and accounts are generated manually. MEMD needs to acquire an accounting software package to be used for project accounting. This should be done not later than six months after effectiveness. Internal Controlsand Audit: 43. The existing Financial Management Manual-FMM (Treasury Accounting Instructions 2003 issued under the Public Finance and Accountability Act 2003) describes the accounting system. The system includes: major transaction cycles of the project; funds flow processes; the accounting records, supporting documents, computer files and specific accounts in the financial statements involved in the processing o f transactions; the chart o f accounts; the,accounting 69 processes from the initiation o f a transaction to its inclusion in the financial statements; authorization procedures for transactions; the financial reporting process used to prepare the financial statements, including significant accounting estimates and disclosures; financial and accounting policies for the project; budgeting procedures; financial forecasting procedures; procurement and contract administration monitoring procedures; procedures undertaken for the replenishment o f the designated account; and auditing arrangements. 44. The ministry has qualified and experienced internal auditors. The head o f the unit reports to the accounting officer, who is the permanentsecretary. The unit issues out reports on a quarterly basis based on their review o f the internal control system o f the ministry and the management at the ministrytakes action on the report. The MoFPED's internal audit commissioner also receives copies o f the audit reports. 45. In order to ensure that the project is effectively implemented, the implementing institutions will ensure that appropriate staffing arrangements are maintained throughout the life o fthe project. BankAccounts 46. Bank accounts will be maintained by the REA, UCC, PSFU, UECC, and MEMD PCU for project implementation. The PCU designated account will serve the participating ministries (Finance, Health, Education, Water, Agriculture, and Local Government). Designated Account: Denominated in US dollars, disbursements from the IDA Credit will be deposited inthis account. Pro-iect Account: This will be denominated in local currency. Counterpart funds and transfers from the designated account (for payment o f transactions in local currency) will be deposited inthis account inaccordance with project objectives. 47. These bank accounts shall be opened at Bank o f Uganda inaccordance with the financing agreement. 48. The signatories for the project, in the case o f the ministries, will be in accordance with the Treasury Accounting Instructions/Public Finance and Accountability Act, 2003. Payments will be approved and signed by the accounting officer (permanent secretary) as the principal signatory and the person authorized by the accountant general, who in this case i s the principal accountant. As for other institution it will be the CEOs as principal signatories and finance directors or other authorized officers. Flow of Funds 49. The participating institutions will be using the report-based disbursement method. Funds flow arrangements for the project (through the two bank accounts above) will be as follows: 0 The institutions will prepare a six month cash flow forecast for ERT I1based on the work plan, and submit the withdrawal application to the Bank after the effectiveness o f the project. Subsequent withdrawal applications should be submitted quarterly with interimfinancial reports (IFRs) within 45 days after the end of the quarter. The 70 quarterly periods follow the calendar year quarters, hence IFRs should be prepared as o f end o f March, June, September and December. IDA will make an advance disbursement from the proceeds ofthe credit based on the cash flow forecast by depositing into a borrower-operated designated account held at Bank ofUganda denominated inUnited Statesdollars. Funds can be transferred from ERT I1 designated account to the project account denominated inUganda shillings to make payments inUganda shillings. The project expenditure can be paid from either the designated account or the project account. These will include transfers to other implementing units under the terms o f accountability instructions issued by the PS MEMD. 71 Figure 3: Overview of Funds Flow: PCU Replenishmentto OperatingAccounts GEF Replenishmentto DesignatedAccounts [1: LL PCU Replenishmentto OperatingAccounts 72 Figure4: ERTI1FundsFlow Chart (Specific for EachDesignatedAccount) DesignatedAccount Project Account (UGX) in (USD)inBOU .,,,.,.,...,.,......,.,,..,.,.. BOU Transactionspaidineither USDor UGX includingtransfers under AccountabilityInstructions issuedby MEMD DisbursementArrangements 50. The IFRswill be submittedfor disbursementon a quarterly basis.Incompliancewith the report based guidelines, we will expect the project to: (a) sustain satisfactory financial managementratingduringproject supervision; (b) submit IFRsconsistent with the agreedformat and content within 45 days of the end of each reportingperiod; and (c) submit a project audit reportbythe due date, within six monthsafter the endofthe financialyear. 51. The institutions will be expected to submit within six months after effectiveness a six monthcash flow forecast basedon its work plan, usingthe report-basedmethodof disbursement to IDA for disbursement. IDA will then deposit funds into the designated account and these funds will be used by the borrower to finance IDA'Sshare of program expendituresunder the proposedcredit. 52. Uponeffectiveness,the institutionswill havethe following disbursementmethods during implementationfor the different components: advances, reimbursements, direct payments and specialcommitments.Ifineligibleexpendituresare foundto have beenmadefrom the designated account, the borrower will be obligated to refund the same. If the designated account remains inactive for more than six months, the borrower may be requestedto refund to IDA amounts advancedto the designatedaccount. 53. IDA will have the right, as reflectedinthe financing agreement,to suspenddisbursement of the funds ifreportingrequirementsare not compliedwith. 73 Financial Reporting Arrangements 54. Formats o f the various periodic financial monitoring reports to be generated from the financial management system will be developed. There will be clear linkages between the information in these reports and the chart o f accounts. The financial reports will be designed to provide quality and timely information to the project management, implementing agencies, and various stakeholders monitoring the project's performance. 55. The following quarterly IFRswill be producedby the institutions; A statement of sources and uses of funds for the reported quarter and cumulative period (from project inception) reconciled to opening and closing bank balances; and A statement of uses o f funds (expenditure) by project activity/component comparing actual expenditure against the budget, with explanations for significant variances for boththe quarter and cumulative period. 56. In addition to the above IFRs, the institutions will also have to submit to the Bank the following information in order to support report-based disbursement: Designated account activity statement. Designated account bank statements. Summary statement o f designated account expenditures for contracts subject to prior review. 57. These financial statements should be prepared in accordance with International Public Sector Accounting Standards (which inter alia includes the application o f the cash basis o f recognition o f transactions) for ministries and International Financial Reporting Standards, for the other institutions. 58. These financial statements will comprise: 1. A Statement of Sources and Uses of Funds/Cash Receipts and Payments which recognizes all cash receipts, cash payments and cash balances controlled by the entity; and separately identifies payments by third parties on behalfo fthe entity. 2. A Statement of Affairs/Balance Sheet at the end o f the financial year showing all project assets and liabilities. 3. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presentedin a systematic manner with items on the statement of cash receipts and payments being cross referenced to any related information inthe notes. Examples o f this information include a summary o ffixed assetsby category o fassets. 4. A Management Assertion that Bank funds have been expended in accordance with the intended purposes as specified inthe relevant World Bank legal agreement. ExternalAuditing 59. The auditor general i s primarily responsible for the auditing o f all government projects. Usually, the audit may be subcontracted to a firm o f private auditors, with the final report being 74 issued by the auditor general, based on the tests carried out by the subcontracted firm. The private firms to be sub-contracted should be among those that have been short listed by the World Bank, following a review of audit firms inUganda. Incase the audit i s subcontracted to a firm of private auditors, IDA funding may be used to pay the cost of the audit. The audits are done inaccordance with International Standards on Auditing. 60. The implementing institutions will submit an audit report to the Bank within six months after the end of each financial year. 61. The implementing institutions have managed IDA projects before. The arrangements for the external audit of the financial statements of the project should be communicated to IDA through agreed terms of reference. Appropriate terms of reference for the external audit should be developedby the institutions and agreedwith the country financial management specialist. 62. GoU does not have a policy that allows public disclosure of audit findings, but Article 41 (1) of the Constitution of Uganda allows the public to access this information. The Access to Information Bill, No. 7 of 2004 has been drafted to complement the clause in the Constitution, and is currently with Parliament. The media under the Press and Journalist Act also has access to information such as audit findings. In addition, the public i s allowed to attend the Public Accounts Committee of Parliament when it is addressingaudit issues. 63. The audit reports that will be required to be submitted by the implementing institutions and the due dates for submission are: Audit Report DueDate 11) ERT I1audited -project financial - Submittedwithin six months after the end of statements. ach financial year i.e. by 31st December iventhat the accounts will be preparedfor financial year ending 30thJune. FinancialManagement Action Plan 64. The action plan below indicates the actions to be taken for the project to strengthen its financial management system and the dates that they are due to be completed by. IAction DateDue Responsibility Issuance of accountability instructions from MEMD Effectiveness. PCUMEMD to the participating ministries accessingdesignated account funds Openingthe designatedbank account in the central Effectiveness The implementing bank acceptableto IDA and communicating the institutions details ofthe bank account and account signatories to IDA (appliesto PCU, REA, UCC, PSFU). Financial and procurement appraisal of UECC First disbursementfor IDA CSF subproject The UECC puts in placeadequate staffing, First disbursementfor PCUIMEMD operational procedures CSF subproject Computerizationofthe PCU accounts unit Within six months PCU/MEMD 75 I Action I DateDue I I Remonsibility after effectiveness. FormulationofauditTORSfor the project. I I I Within six months IThe implementing ~~ after effectiveness institutions Conclusionof the Assessment 65. A description of the implementinginstitutions financial management arrangements above assesses the financial management risk as modest and indicates .that although the project satisfies the Bank's minimumrequirements under OP/BP10.02, there remain improvements to be effected for the system to be adequate to provide, with reasonable assurance, accurate and timely information on the status of the project as required by the Bank. The recommended improvements are detailed inthe Financial Management Action Plan above. 76 Annex 8: ProcurementArrangements UGANDA: Energyfor RuralTransformationI1 A. Background 1. The objective of the proposed project is to increase access to energy and information and communication technologies (ICTs) inrural Uganda. ERT I1will build on the experience o f ERT Iandwillbeimplementedby10PublicEntitiesandthePrivateSectorFoundationofUganda (PSFU). The lead agency for procurement i s the Rural Electrification Agency. Each o f the agencies will do their own procurement and a Project Coordination Unit will coordinate the activities (including procurement) o f the various implementingagencies. Additional procurement will be done by private sector entities which receive grants under the project and loans through the CSF. B.ApplicableGuidelines 2. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines:. Procurement under IBRD Loans and IDA Credits" dated May 2004 revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers'' 'dated May 2004, revised October 2006, and the provisions stipulated in the legal agreement. Procurement by the private sector underthe sub projects and the CSF supported loans will follow commercial procurement practices acceptable to the bank and consistent with the banksprocurement and consultant selection guidelines. Contracts above the indicated thresholds shall be subject to prior review. The operational manual shall define the acceptable commercial procurement practices. The various items under different expenditure categories are described in general insection E below. C.Use of NationalProcurementSystem 3. All contracts following national competitive bidding (NCB) will follow the national public procurement law (the PPDA Act o f 2003 and attendant regulations). These procedures have beenreviewedby the Bank and found to be acceptable, except for the following provisions which will not be applicable underthis project. i) Negotiationswiththebest evaluatedbidder. Thispracticeisnotappropriate, except for consulting services contracts and for goods and works under exceptional circumstances. l6 ii)Themeritpoint systemfor bid evaluation.This shall notbeappliedfor goods and works contracts procuredon basis o f competition (international competitive bidding, NCB, or restricted tender). iii)Pre-qualifiing bidders and then inviting only afew on a rotational basis. For shopping procedures, the procuring and disposal entity (PDE) will not be allowed to pre-qualify suppliers on an annual basis and then invite only a few on a rotational basis. Where bidders are prequalified, all pre-qualified providers shall be invited to submitbids/quotations. 16Negotiation here involves seekingchanges to the conditions of contract including the price and scope but excludes technical discussionsto seek clarifications and agree on work programswith an awardedbidder. 77 iv) Direct Contracting as the default procurement methodfor contracts estimated to cost the equivalent of $1,100 or less (defined in the PPDA Act as micro-procurement), There will be no use of the micro-procurement method as a default procurement method for each contract estimated to cost the equivalent of $1,100 or less. Micro- procurement is by definition direct contracting, which should be used on exceptional basiswith adequatejustification andwith the Bank's prior approval. v) Application of Domestic Preference under NCB. Domestic preference shall only be applied under international competitive bidding (ICB). vi) Charging of fees for dealing with bidder complaints at procuring entity level. The procuring entities shall not be allowed to charge bidders fees for dealing with their complaints 4. Under the proposedproject, procurement under ICB shall (inaddition to the World Bank guidelines) comply with the national system except where the two conflict. Specifically, the Contracts Committees shall perform their oversight functions at each of the key procurement stages and contracts shall, as required,be subjectedto the Solicitor General's clearance. 5. Procedure for Shopping: Shopping shall follow the FWQ procedures as defined in the PPDA Act and attendant regulations with the exception of the rotation of bidders as indicated above. These procedures have been reviewed by the Bank and found to be satisfactory. In addition, no negotiations shall take place with respect to a quotation submitted by the supplier or contractor. D. SolicitationDocumentsto be Used 6. Goods and Works: The Bank's standard bidding documents will be usedfor procurement under ICB, and for procurement under NCB with appropriate modifications. Alternatively, the standard tender documents for procurements of supplies, works and non-consultancy services preparedand issuedby the Public Procurementand Disposal of Assets Authority (PPDA) may be used for NCB. Where the PPDA documents are used, only the "Technical Compliance" selection methodology as defined in the Act shall be adopted. The rest of the methodologies shall not be used, even for NCB, for the procurement of goods, works and non-consulting services. 7. Consulting Services: The Bank's Standard Request for Proposal document will be used in the selection of consulting firms. Short lists of consultants for consulting services contracts estimated to cost less than $200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The PPDA procedures and Standard Bidding Document for the Procurement of Services shall not be used. 8. Framework Contracts for common supplies like stationery and consumables will be procured annually to enable implementing agencies to place orders for urgently neededsupplies at short notice, at a competitive price. As such, commonly purchased items like stationery and consumables shall be aggregatedandprocured using framework contracts. 9. Non-Consultancy Services: Specialized standard bidding documents shall be developed for use in the selection of concessionaires to operate distribution networks by REA. These 78 documents shall be subject to review and comments by IDA. Specialized bidding documents preparedunder ERT Ifor the provision and maintenance o f ICT solutions shall be updated and used for the procurement o f these services. E. Scope ofProcurement underthe Project 10. Procurement of Works: Works contracts to be procured under the project include electricity grid extensions, grid interconnection works, grid intensification works and development o f independentgrids. These works will be procured by the REA. 11. Procurementof Goods: Goods procuredunderthe project are listed inTable 13. Table 13: Goods to be procuredunder ERT I1 I Agency I Goods Private Sector Motor vehicle, office equipment Foundation Uganda Uganda Supply o f charging facilities into community information Communications centers, development and implementation o f information Commission dissemination technologies, supply and installation o f computer networksAaboratories in schools, and supply o f and installation o f computer labs inhealth centers. Ministry ofEducation Supply, installation and maintenance of energy packages in and Sports schools, computers and peripherals. Ministry o f Health Supply, installation and maintenance of energy packages in health centers, office equipment, and motor vehicles. Ministry of Water and Supply, installation and maintenance o f energy packages for Environment water supply. Ministryof Energy and Compact fluorescent lamp testing equipment, energy efficiency Mineral Development equipment, office equipment and vehicles. Agency Consultancy Services RuralElectrificationAgency Designand supervisionof electricitydistributionnetworks, design and supervisionof solar /diesel hybrid grids, audit of projectaccounts, preparationof standardbiddingdocuments for electricitydistributionconcessions, feasibility studies for independent grids 79 Agency Consultancy Services Private Sector Foundation Businessdevelopment support to energy developers, business development supportto utility commercialoperators, audit and verificationof energy savings inprivate industries, audit of projectaccounts Uganda Communications Audit of projectaccounts, design and supervision of computer Commission labsfor schools andhealthcenters, monitoringand evaluation Ministry of Educationand Designand supervisionof energy packages in schools, sports monitoringandevaluation Ministry of Health Designand supervisionof energy packages in healthcenters, monitoringand evaluation Ministry of Water and Designand supervisionof energy packages for water supply, Environment monitoringand evaluation Ministry of Energy and Development and implementationof a communicationstrategy, Mineral Development design of rural lighting solutions, feasibility studies of energy efficiency improvements in street lighting for local governments Ministry of Finance, Planning Impactevaluationsurveys and EconomicDevelopment 14. OperatingCosts: The project will finance operating costs of the various implementing agencies that directly relate to project implementation. The project's operating costs will include: fuel and vehicle maintenance for project vehicles, stationery, goods and equipment such as computers, office furniture, communication expenses, subsistence allowances for authorized travel, and equipment. 15. Training. The project will formulate an annual training plan and budget which will be submittedto the Bank for its prior review and approval. The annual training plan will, inter alia, identify: (i)the training envisaged; (ii)the justification for the training, how it will lead to effective performance and implementation of the project and or sectors; (iii) the personnel to be trained; (iv) the selection methods of institutions or individuals conducting such training; (v) the institutions which will conduct training, if already selected; (vi) the duration of proposed training; and (vii) the cost estimate of the training. Upon completion of training, the trainee shall be required to prepare and submit a report on the training received. F.Assessment of Capacity to ImplementProcurement 16. Procurement under the project will be conducted by the several agencies as indicated in Table 15. All of these entities conducted procurements under ERT Iand will therefore building upon their experience in the predecessor project. A capacity assessment of these entities was conducted in between June and December 2008 and the findings, key risks and the agreed mitigation measures are summarized below. 80 Table 15: Procurementunder ERT I1by Agency Agency Volume of Strengths Weaknesses Risk Action Plan Completion Procurement Relative to Date Volume of Procurement Rural High Procurement Procurement Substantial Recruit additional Jun-09 Electrification officerand officer technical staffand part Agency contracts inexperienced time consultantsto committee in incomplex increase technical place. procurement capacity andbackstop Technical andexisting inpeakperiods. experience technical available from specialists Backstoppingfrom Ongoing ERT I. will be PCUproc specialist. Additionalproc stretched officerbeing with the Hireexperiencedpart Jun-09 recruited expected time procurement investments consultantto coach procurementofficers Private Sector Low Experienced None Low Foundation procurement specialist in place, contracts committee operationalized, experienced technical staff Uganda Substantial Experienced None Low Communications procurement Commission officer,CC in place,good ERT I performance, RFPtemplates for concessions availableandto be updatedas necessarywith consultant support Ministryof Medium PDU and LimitedPDU Substantial Recruit energy officer, Apr-09 Educationand contracts experience in PCUprocurement sports committee in IDA specialist to backstop place,some procurement, ministry PDU experience significant from ERT I, delaysunder capacity being ERT I,no built under technical Secondary expertisein Education energy in the Project, ministry coordination strengthened 81 Agency Volume of Strengths Weaknesses Risk Action Plan Completion Procurement Relative to Date Volume of Procurement Substantial Proc officer None Low experiencedin IDA procurement, strong technical expertise, strong ERT I performance Substantial Proc officer None Low Water and experiencedin Environment IDA procurement, strongtechnical expertise, strong ERT I performance Ministry of Low Experienced Delays in Low Energyand procurement payment and Mineral specialist at contracts Development PCU, CC in committee place, technical approvals expertise available Ministry of Low Experiencein None Low Finance, IDA Planningand procurement Economic especially , Development under FINMAP, contracts committee in place Ministry of Low Procurement Limited PDU Low Local capacity being experience in Government built under IDA LGMSD procurement project butvery low volume of procurement under ERT I1 17. In addition to the above specifiedmitigationmeasures, the procurement specialist at the PCU shall backstop the procurement units inthe other entities to provide support as requiredin preparingandupdatingprocurementplansas well as implementingprocurement. 18. The assessment also reviewedthe various steps involvedin the procurement process by the GoUas well as their averagedurationandthe detailsare indicatedinTable 16. 82 Table 16: Durationof Selected ProcurementProcesses IStage I CumulativeTime (Weeks) I Initiationof Procurementby Completing Procurement Requisition 1 Preparationof Bidding Document 3 Contracts Committee Approval of BiddingDocument 5 Advertising / Issuance of BiddingDocument 6 Receipt and Opening of Bids 12 CC Approval of Evaluation Team 14 Evaluation of Bids 18 CC Approval of Evaluation Report 20 Notice of Best Evaluated Bidder 34 Award Of Contract 35 Negotiations and Preparationof Contract 37 Solicitor General Amroval of Contract 39 Signature of Contract 41 TotalTime 41 19. From the assessment, significant delays are usually experienced at the bid evaluation stage due to delays in appointment and approval of the evaluation teams. To minimize this delay evaluation teams shall be appointed and oriented in advance of bid opening so that they are in position to commence evaluation immediately after bid opening. This will require that these evaluation teams are identified and approved by the contracts committees together with the bidding documents. Further delays are also experienced at initiation of the procurement process with many user departments providingterms o f reference/specifications late. The coordinators in each of the agencies together with the PCU shall regularly monitor procurement plans to ensure that procurement commences and is processed as planned. 20. Considering the volume of procurement to be conducted under the project and the capacity of the agencies, the overall risk for procurement to the project i s Moderate. This rating will be reviewed annually during the annual procurement post review (PPR), G. ProcurementPlans 21. The borrower preparedprocurement plans which were reviewed and agreedbetweenIDA and the GoU prior to the negotiations. All contracts which shall be eligible for retroactive and project financing shall follow the procurement plan. The procurement plans will also be available in the project's database and in the Bank's external website. The procurement plans will be updated in agreement with IDA annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. The private sector sub projects proposalswill include procurement plans for the goods, works and consultantsto be procured. H. FrequencyofProcurementSupervision 22. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the implementing agency recommends six monthly supervision missions to visit the field to carry out expost review of procurement actions. 83 I.DetailsoftheProcurementArrangementsInvolvingInternationalCompetition 1. Goods,Works, andNonConsultingServices (a) RuralElectrificationAgency Goods, Works and F 8 9 Contract (Description) Expected Comments Method Bid Opening Date Construction of high voltage lines and associated -L substationsand low voltage networks in :Lot 1: Soroti- Katakwi-Amuria; Lot 2:Ayer-Kamudini & Minakulu Bobi; and Lot 3 Ibanda-Kazo-Rushere 9,069,023 ICB Construction ofhigh Voltage lines and associated substationsand low voltage networks: Lot 1 - Gulu- I Acholibur, Paicho-Patiko- Palaro line and Lot 2 Opeta- Achokora Line 6,522,374 ICB Goods, Works and Non-Consulting Services 1 2 3 4 5 6 7 8 9 Ref Contract Estimated Proc. P-Q Domestic Review by Expected Comments No (Description) cost Method Preference Bank Bid (US$) (yesh'o) (PriorPost) Opening Date Only licensed telecom New Community providers Information Centers are able to 1 (CICS) 2,2 18,150 ICB Post Yes Prior 1-Mar-10 participate Charging facilities 2 for CICs 600,000 ICB Post N/A Prior 1-Feb-10 Last mile broad band 3 services 4,000,000 ICB Post Yes Prior 1-May-10 Lot 1: Computer labs for schools and Lot 2: ICT facilities 4 for Health Centers 1,380,000 ICB Post N/A Prior 1-Mar-10 (c) Ministry of Water andEnvironment 84 Goo i, Works a Zonsulting ! rvices 2 3 4 - 5 6 7 8 9 Contract Estimated Proc. P-Q Domestic Review by Expected Comments (Description) cost Method Preference Bank Bid (US$) (Yesmo) (PriorPos Opening - 9 Date Supply and installation of energy packages for water supply schemes in small towns and rural growth centers - Lot 1: Region 1, Lot 2: Region 2, Lot 3: Region 3 and Lot 4: Region 4 I 7,350,000 I ICB ,Post ,No , Prior 17-Mar-10 (d) Ministry of Health Goods, M rks and Non. :onsu ing S;rvicei - ~ ~ 1 2 3 4 5 Ref Contract(Description) Estimated Procurement P-Q Domestic Review by Expected Comments No cost (US$) Method Preference Bank Bid Opening - (yesmo) (PriorPost) Date Batch 1: Procurementand installation of energy packages for health centres in Kibaale, Mubende, Mityana, Luwero, Nakaseke, Rukungiri, Kabale and 1 Kanungu districts 3,476,385 ICB - Post Batch2: Procurementand installation of energy packages for health centres in Amuru, Apac, Dokolo, Kaberamaido, Kitgum, Moroto, Nakapiripirit and 2 Adjumani districts 2,464,756 ICB Post No IPrior I2010 Batch 3: Procurementand I I I installation of energy packages for health centres in Bukwo, Sironko, Mbale, Mayuge, Katakwi, Amuria, Masindi and Bundibugyo 3 districts 3,292,498 ICB - Post (e) Ministry of Educationand Sports 85 Goods, Works and F In-Conr lting Services 5 6 Contract (Description) P-Q Domestic Method Preference (US$> (Yesmo) Date Supply and installation o f energy packages for post primary schools and I institutions - Lot1: small institutions, Lot 2: big institutions 2,750,000 ICB Post N o (a) International Competitive Bidding (ICB): All ICB contracts estimated to cost above US$500,000 for Public Entitiesand US$2,000,000 equivalent for private sector for goods and US$5,000,000 equivalent for works per contract and all direct contracting will be subject to prior review by the Bank. Additionally identifiedN C B and LIB contracts as specified in the procurement plan shall be subject to prior review. The procedure for submission o f contracts by private sector sub projects shall be specified inthe operational manual. 2. ConsultingServices. (a) RuralElectrificationAgency Consult Services 1 Ref Description of Assignment No Proposals 1 Date 1 1 Design, environmental assessment, social economic analysis and supervision o f works for Gulu-Acholibur and Paicho- 1 Patiko-Palaro line 300,000 QCBS Prior 0812512009 Design, environmental assessment, social economic analysis and supervision o f 2 works for Opeta-Acokora line 300,000 QCBS Post 0512512009 Design, environmental assessment, social economic analysis and supervision o f works for Lot 1 Masindi-Waki and Lot 2 Buseruka Line and Lot 3 Amatte Gaitu 3 Proiect 500,000 QCBS Post 06/02/2009 Two engineering consultants- 4 imDlementation SUDDO~~ 300,000 ICs Prior 07-July-09 (b) Ministry of EnergyandMineralDevelopment 86 1 2 3 4 5 6 Ref Description of Assignment Estimated Selection Review by Expected No Cost (US%) Method Bank Proposals (PriorPost) Submission Date 1 CSF Fund Manager 400,000 QCBS Prior 23 Jun-09 - (c) UgandaCommunicationsCommission 1 2 3 4 5 6 Ref Description of Assignment Estimated Selection Review by Expected No Cost (US%) Method Bank Proposals (PriorFost) Submission Date 1 Design and supervisionof sub-county 300,000 QCBS Prior 15-May-09 broadbandsolutions 2 Verification of investments for new 200,000 QCBS Prior 1-Mar-10 CICs and broadbandservices (d) Ministryof Water and Environment isulting Servic 1 2 3 4 5 6 Ref Description of Assignment Estimated Selection Review by Expected No cost (US%) Method Bank Proposals (PriorPost) Submission Date 1 Implementation support, designand 300,000 QCBS Prior 8-Apr-09 supervisionof energy packages for water supply schemes Date of bank approval of theplans: February 11,2009 (a) Quality and Cost Based Selection(QCBS) andIndividualConsultants (i) Consultancy services estimated to cost above US$200,000 equivalent for firms and US$100,000 equivalent for individual consultants per contract and single source selection of consultants (firms) for assignments estimated to cost above US$5,000 equivalent will be subject to prior review by the Bank. (ii) Shortlists composed entirely of national consultants: Short lists of consultants for services estimatedto cost less than US$200,000 equivalent per contract may 87 be composed entirely of national consultants in accordance with the provisions of paragraph2.7 of the Consultant Guidelines. J. ProcurementThresholds Expenditure Contract Value Threshold Procurement Contracts Subject to Category (US%) Method Prior Review (US%) 1. Works Above US$5,000,000 ICB All contracts Below US$ 5,000,000 NCB/ Commercial As specifiedin PP Practices None Below US$ 100,000 Shopping 2. Goods Above US$ 500,0001' ICB All contracts Below US$ 500,000 NCB / Commercial As specified in PP Practices None Below US$ 50,000 Shopping 3. Consultin With firms above US$200,000 QCBS All contracts Services 1Band Training With individualsabove US$ Individual All contracts 100,000 With Firmsbelow US$200,000 Qualifications/Other None With Individualsbelow US$ Individual None 100,000 4. Non Consulting Above US$400,000 ICB All contracts Services Below US$400,000 NCB/ Commercial As specifiedin PP Practices Below US$ 50,000 Shopping None 5. All Types of All Contracts Sole source / Direct Contracts Contractingand TORS As specifiedin PP 17For the Private Sector, all ICB contracts for goods estimated to cost above US$2,000,000 equivalent per contract shall be subject to prior review by the Bank 18Short list of consultants for services, estimated to cost less than $200,000 equivalent per contract, may comprise entirely of national consultants in accordancewith the provisions of paragraph 2.7 of the Consultant Guidelines. 88 Annex 9: Economicand FinancialAnalysis UGANDA: Energyfor Rural TransformationI1 1. Both revenue-producing and non revenue-producing activities are financed by this project. The main revenue-earning activities are those financed through Component 1 and would include, (i)grid-based rural electrification schemes; (ii)independent grids based on diesel or mini-hydro generation (mini-grids); and (iii) grid connected renewable energy power generation (mini-hydro or cogeneration plants). The other activities are largely non revenue-producing. 2. In general, the economic benefits of the non revenue-producing activities, such as providing basic amounts o f electricity to rural health and educational facilities, have been widely accepted as significant. It is more important for these activities to ensure that they are implemented expeditiously in a least-cost manner with sustainable operation and maintenance arrangements. Further, these activities are a small part o f the total project cost. Hence, no economic or financial analysis is presented for these activities. 3. IREMP. An important number o f potential revenue-producing projects have been identified by the Indicative Rural Electrification Master Plan Study (IREMP), which was financed under ERT I.The purpose o f preparing the IREMP was to develop a framework that would be used by the REA to select and prioritize investmentsinthe future. 4. The IREMP has been developed to reflect various alternatives o f future network extensions, taking into account any planning for future transmission lines, sub-stations and distribution networks, industrial projects and international power exchange projects. The IREMP outlines guidelines, describes preferred standards and the phased implementation o f future rural electrification inUganda, as well as giving estimations o f costs. The IREMP i s intendedto act as a catalyst for the implementation o f rural electrification projects. 5. The IREMP is therefore to be seen as a hybrid version o f a traditional electrification master plan utilized by national utilities for network investments and a promotion tool for a newly developed rural energy agency to inform and attract private sector investments in pre- selected areas, based on commercial and subsidy grant financing. 6. The electricity consumers that IREMP seeks to target are: Economic sectors within the country, especially those where lack o f access to electricity i s hampering cost o f production or quality o f service, including water, health, education, water, agriculture, telecoms, mining, etc. 0 Rural settlements made up o f small informal businesses covering a huge range o f activities from shops to salons, restaurants and hotels, computer centers, video halls, garages and banks. Domestic household within settlements could make up a further connectionnumbers. 7. The key economic sectors are: Health. Almost all Government hospitals (98%) have access to modern energy, although the smaller hospitals (NGO hospitals) have a grid electrification rate o f 89 less than 50 percent. O f the health centers, only 6 percent have access to grid electricity. Education. Eighty five percent o f tertiary and training institutions have access to grid electricity, while 27 percent o f secondary schools and only 5 percent o f primary schools access the grid at present. 0 Agriculture. Almost all large dairies, most horticulture enterprises, all sugar factories, all but one agricultural research centers, 80 percent o f the 20 large wet processing coffee plants and most cotton ginneries are grid connected. Only seven o f the 27 large commercial farms, eight o f 56 fish landing/processing sites, one o f three maize mills are connected. There is further potential to connect oil processing plants, saw mills and tea factories. Miningand Quarrying. O f the 48 mines that are candidates for connection, 28 mines are targets for connection immediately on the current grid expansion plans, and the remaining mines should be targeted in coming years, depending on the mining exploration results. O f the 48 queries surveyed, 12 had grid connection available while 36 were remote from the grid Water Sector. The Directorate o f Water Development (DWD) has identified and prioritized some 750 rural schemes within settlements, o f which about half are within one kilometer o f grid lines. Practically all rural trading centres that are without electricity are without water supply too, so electricity demand for water must be included inthe TC electrical load analysis. Telecoms and ICT. UTL and MTN alone operate some 350 cell phone masts. O f these only 38 are inremote rural areas runningon diesel at key nodes. Extensive areas o f the country do not currently have access to cell phone service, and expansion o f the electricity grid could be a factor in expansion of voice and data services to these areas. 8. As regards households: As o f 2002, approximately three million people live in urban areas with the remainder being rural. The population density i s 119 persons per square kilometer and the average household size i s 4.8 persons per household. O f the estimated six million households, some 4.7 million o f these are in rural areas. Twelve percent o f the population i s currently estimated have access to electricity, although 33 percent o f the urbanpopulation had access compared to only 4 percent o f the rural population. Dense rural settlements can be more cost-effectively supplied with electricity services that than dispersed households. Rural households outside o f settlements tend to live on smallholdings at a population density o f approximately one household per acre. Any customers inside the immediate footprint of a trading centre will be candidates for grid connections as part o f the settlement LV network system. Any households in the less dense areas from the settlement are not as cost- 90 effectively connected and additional charges may be required. In some cases this will be a marginal LV cost, but in other cases the costs o f separate transformers will be incurred. The development o f the electrical loads within settlements was based on generalized surveys and analysis o f levels o f electricity consuming economic activities, and separate surveys o f households. The data was then used to develop typical sizing data fitting the trading centre and covering all the non-electrified trading centres. 9. Master Planning Process. The master planning process is the sequence of activities to address the demand for electricity as described in the previous chapter. It comprises identifying appropriate technologies and designs to be applied to rural electrification, identifyingpotential rural electrification areas and projects, selecting and applying appropriate technologies to these projects and prioritizing amongst the various projects. 10. Renewable energy policy. InERT I,GoU also developed its Renewable Energy Policy, with the aim ofproviding the framework for promoting renewable energy. The goal is to increase the use o f modern renewable energy, from the current 4 percent to 61 percent o f the total energy consumption by the year 2017. The policy objectives and strategies are shown at the end ofthis annex. 11. The implication is that the major investment activities supported by this project underline the "Framework" character o f this APL. Thus, the economic and financial analysis presented below appraises the mechanism that will be used for screening the activities to be undertaken to ensure that they are economically and financially justified. EconomicAnalysis 12. The project will require that REA demonstrate that grid extension and off-grid electrification projects financed underERT I1rank are inaccordance with the IREMP. 13, IREMP prioritizes grid uro-iectsbased on the following technical-economic criteria: 0 In principle, lines implying the lowest marginal cost (tariff) should be constructed first. Where one line depends on another (i.e. a predecessor line has to be built before this line can be energized), the line is demoted in the sequence until such point that it together with its predecessor can compete (on a tariff basis). 0 When the cumulative load o f additional lines require up-stream network strengthening to be carried out, all lines already prioritized share in the cost o f such strengthening (since all contribute to the peak demand). 14. Regional equity i s not specifically considered. This would be achieved be accelerating or decelerating the dispatching o f projects ina specific area relative to other areas. 15. A proxy method for assessing viability of grid extensions has been developed inparallel with the more complex financial analysis. The benefitspoints approach provides `rules o fthumb' to determine line viability, and can be applied as a proxy for the tariff calculations. Each 91 potential project would accrue a number o f `economic benefit points' in order to take in to account social and economic benefits that arise from rural electrification. 16. A system o f calculating benefit points has been developed in order to try and quantify social benefits as well. The system uses the electrification benefits of a rural household as a base, and assigns a value o f one benefit point per household. The system aims to take into account both the size o f the load (in kWh), its contribution to the overall financial feasibility o f the line extension, as well as its weighting for the social benefits. The benefits o f the electrification o f other institutions and industries are designated against this reference point. The details o f the system are presentedbelow. As an example, electrification of a small shop or other trader is considered to provide three times more economic benefit as a household on the basis o f the potential for increased income generation that may accrue through electrification. Electrification of a Health Centre (HC4) accrues 70 benefit points. 17. For off-grid projects, IREMP requires that they be located in regions with high income levels and affordability, reasonable consumer density, significant social service and income generation potential. Inthe absence o f detailed field data, IREMP suggests the following criteria: 0 Tariff is the primary prioritization criterion. Benefit points i s the secondary prioritization criterion. 18. For grid-connected renewable energy Dower generation, the projects should follow the Renewable Energy Policy's Power Generation Program. This program will support public and private sector investments in large hydropower schemes and one for small power schemes. Only small power schemes (limitedto 20 MW installed capacity per plant) are relevant for ERT 11. 19. For these schemes, basic studies o f the various resources and sites will be carried out, followed by promotion and tendering to the private sector, which will be responsible for their implementation This will cover mini hydropower schemes, biomass cogeneration, wind power, peat, geothermal and solar thermal electric. These projects will earn revenues based on the pre- set feed-in tariffs. 20. The feed-in tariff is designed so that the investor will not require a capital subsidy to resort to a capital subsidy. The feed-in tariff-about 6 $ per kWh on average-differentiates between peak, shoulder and off-peak prices to reflect the higher value o f power in the peak period and between short- to medium-term prices and long-term prices, to reflect the higher risk o f load shedding inthe short to mediumterm. 92 Water Educatlofl . Agriculture I . I 1.3 3 U c m n 5 1. COP 4 3 93 Financial Analysis 21. This financial analysis presents the current financing schemes envisaged for the three revenue generating investment schemes that may get supported by parts o f this project. Ina first step the analysis outlines the anticipated flow o f funds and application o f subsidies envisaged based on the proposed investment project structures. As a second step the analysis describes the, anticipated financial safeguard measures and financial analyses that would need to be performed and reviewed by the Bank prior to the conclusion o fthe contractual arrangements. 22. Those prior reviews and conditions for the Bank's No Objection to the procurement o f the investments will ensure that the Bank's requirements for financial sustainability of the investment activities are met. Structure of supportedinvestmentschemes and flow of funds 23. Grid-based rural electrification schemes. For this sub-component the proposed implementation approach i s similar to the approach already applied under ERT I.The main principle i s for REA to pursue designs for incentive programs that are aimed at attracting the private sector, with the risks and rewards shared fairly between the public and private sectors. Originally under ERT Iit was foreseen that the entire grid extension scheme could be financed and structured by the private sector, but lack o f interest due to highrisk perceptions led private investors hesitate to invest inthe schemes' infrastructure. 24. Therefore the Rural Electrification Agency under ERT Ibegan financing new access projects under an arrangement in which REA constructs, with GoU ownership, the necessary transmission (linkage between the main grid and the targeted extension area) and distribution infrastructure (low voltage distribution lines except for the final linkages to the end consumer take off point). The new infrastructure i s then concessioned to the private sector under a management contract that includes provisions for some private finance for extensions. This arrangement will continue under ERT 11. 25. The expected major flows o f funds expected under those schemes are shown in Figure 5. - Figure 5: Grid BasedRural Electrification Flow of Funds I UETCL I Power Purchase costs End consumer sales revenues End Consumers Connection Fees tobybeGrid pre-financed Operator Loan Proceeds from ERT /Ionlent by MOFPED as a grant for the T&D equipment purchase 26. As can be seen from the above chart, REA will financially support electrification schemes in two ways. REA will use ERT I1 investment loan proceeds to finance the necessary transmission and distribution infrastructure procurement. The necessary funds will be provided 94 to REA on a grant basis from MOFPED thus not triggering any financial costs (repayment or interest charges) to REA. The supply and installation o f the equipment will be bid-out by REA in the form o f a turn-key equipment supply contract on a competitive basis. This will ensure cost efficiency and transparency inthe use o f funds. 27. Ina second step, the newly provided distribution infrastructure will be concessioned to a private investor who will be obliged to operate and maintain the infrastructure on a long-term (probably lo+ years) basis. The private operator will have to pay a monthly concession fee to REA. The private operator will have to recover those concession fee expenditures from the end consumers and thus to limit the effect o f those fees on end-consumer prices. REA i s expected to only be able to recover part o f its investments made from those fee revenues. The uncovered balance will thus be REA's indirect subsidy to the electrification scheme. 28. The second financial contribution by REA to those grid-extension schemes is a direct connection subsidy to the end consumers to be financed with Global Partnership for Output- based Aid (GPOBA) funds under this project. One o f the major constraints faced by many Ugandans within the vicinity o f the low voltage grid networks is payment o f connection costs. From REA's experience with new concessions, this hurdle has affected the performance o f the concessions because o f much lower consumer penetration than originally projected. Therefore for new projects, an initial subsidy o f US$40 per consumer i s currently foreseen. 29. With regardto the practicalities regarding this subsidy, the grid operator is supposed to pre-finance the connection subsidy. Once the connection infrastructure has been installed, an independent verification agent such as an auditing or technical firm verifies the outputs and reports to the OBA fund. Once the OBA fund is satisfied that the services have been delivered it provides the subsidy through REA to the investor. 30. The private investor's major costs will be UETCL's charges for the provision of power under a power sales agreement, includingcertain wheeling charges payable to Umeme where the grid extension is connected to the Umeme grid. The price charged by UETCL to the private concessionaire will be the bulk supply tariff (BST) approved by the regulator ERA, which UETCL charges all its off-takers. The BST i s currently subsidized by the GoU due to the important amount o f expensive emergency thermal generation, but with increasing supply from renewable energy generation and the commissioning o f the Bujagali plant in 2011, those subsidies could be phased out inthe near future. UETCL is not anticipated to incur any financial loss from those grid-extension projects unless it cannot meet the contracted amount o f power supply* 31. The other costs related to the private concessionaire's distribution activities will be its daily operational expenses (including salaries, financing charges, concession fees, etc.) and investmentcosts relatedto its further grid extension obligations. The concessionaire will be able to recover those costs through the sale o f electricity to the end consumers. The electricity prices will have to be approved by ERA based on a tariff methodology that will be included in the concession agreements. 32. It is expected that the ERA will approve full cost-recovery level prices per kWh which are likely to be higher than the current end-consumer prices in the main grid. This i s likely to 95 happen evenwith the amount o f subsidies foreseen by REA. However with an increasing number o f consumers inthose schemes and growing electricity consumption levels, kWhprices will have a chance to fall inreal terms due to economies o f scale, and subsidy levels could be reduced over the years. 33. Independent Grids. This component will support development of mini-gridsinthe areas that will not be served by the national grid inthe next years, but which are considered high load growth centers, with lack o f electricity impacting on the economic and social service delivery. The activity will be implemented by REA and will include grants for grid development, consumer connections, in addition to PSFU business development support and credit enhancement from the Credit Support Facility (CSF) where required. 34. These investments schemes had already been started under ERT I,but the grid extension schemes experienced difficulties inattracting adequate private sector interest. Only one mini-grid substantially developed by the private sector has been established in West Nile under ERT I,but there were significant delays in reaching financial closure as well as implementation and also a need for a high level o f subsidies. Thus, in those schemes REA intends to follow the same approach as for the grid-based rural electrification, with an initial emphasis on public funding andprivate concessionaires. 35. The expected contractual arrangements and major flows o f funds expected under those schemes are shown inFigure 6. Figure6: IndependentGrids Flow of Funds I Fuel Supplier I 4 Fuel costs i (in case of Diesel generation) A [ / End consumer sales revenues End Consumers Concession F; T&Dlnfrastructure Subsidy for toConnectionbe pre-financedFees by Grid Operator Loan Proceeds from ERT I/ onlent by MOFPED IDA as a grant for the T&D equipment purchase 36. The main difference to the grid-based schemes is that the private sector partner will be responsible to procure, finance and operate the power generation facilities required for the operation o f the grid, in addition to the operation and maintenance o f the independent grid. The identification o f independent grid projects will follow the IREMP's priority list. Diesel mini- grids are currently most prioritized by the IREMP. 96 37. This additional generation requirement will create a higher financial exposure for the private operator in terms o f investment costs as well as fuel price risks. It i s anticipated that for the fuel supply the private operator will enter into a fuel supply agreement with one o f Uganda's main fuel supplying companies and the fuel prices could only be fixed in the short term thus exposing the investor to world market oil price fluctuations. 38. The end-consumer electricity tariffs would have to be approved by ERA and would be set at a cost-recovery level. REA would subsidize grid-extension schemes by providing the distribution infrastructure against a concession fee which would probably not be able to recover the full investment costs of the grid infrastructure. Secondly REA would use GPOBA funds to directly subsidize the connection fees for the end consumers in similar amounts as for the grid- extension schemes (the subsidy would also have to be pre-financed by the grid operator). While those two subsidy elements are certainto be used for those independent grids, an additional form o f indirect subsidies financed by this APL could be the use o f the CSF at the debt financing level o f the private investor's project company. 39. Since the investment costs for the private investor are likely to be higher in those schemes involving the investment in small generation facilities, the enhancement o f available debt financing (i.e. longer tenors and lower interest charges) could become crucial to make those schemes financially attractive for the private sector. The CSF would represent such a mitigation tool by providing certain risk coverage and refinancing risk mitigation measures to local commercial banks that would participate inthe financing o f those private investments. 40. Renewable Energy Power Generation. Compared to the two sub-components described above, grid-based renewable energy power generation projects were able to attract significant private sector interest during ERT I.New investments are likely to be in cogeneration and small (10-20MW) hydro generation projects. The private sector is expected to raise the necessary equity and debt for project financing and no direct subsidies from REA or MEMD are currently foreseen. However, these investments will have access to the CSF supported by this APL if required to attract the necessary debt financing. 41. In addition, REA will consider partial or full financing of the required grid interconnection betweenthe renewable power generation station and the grid, especially in areas where such lines also will contribute to access expansion. In such cases the renewable power generation project will be expanded by a grid expansion scheme as described above. With regard to IDA'Sreview o f the financial feasibility o f those projects, this requirement would only apply iffunds from thisAPL aredirectly supportingthe infrastructureinvestments inthose schemesby REA in form of a transmission line financing and the concessioning o f this infrastructure to the private sector in the form o f a grid extension scheme. In cases where a renewable power generation project would benefit from IDA funds through the CSF, the Bank team would rely on the financial due diligence process foreseen by the CSF unit. 42. Thus REA would participate in a power generation scheme by financing and subsequent concessioning to the private sector o f the interconnection facility o f the power station to the grid (Figure7). 97 Figure 7: Renewable Power Generation Flow of Funds Mini Hydro Private Independent Power End consumer sales Power <-pFl revenues End Producer Consumers A Connection Fees Debt Vlnterest tobybeGrid pre-financed Operator Commercial Banks Loan Proceeds from ERT /I onlent by TRef%&g MOFPED as a grant for the T&D equipment purchase IDA proceeds 43. The main project structure o f those renewable power generation schemes is similar to the structure o f independent power producer projects (IPP). The private sector investor will create a special purpose company that will raise the necessary financial resources and then built, own and operate the generation station. The company will enter into a power purchase agreement (PPA) with UETCL, as with large IPP schemes (like Bujagali). Smaller projects are expected to use the template o f a standardized PPA that GoU recently developed within its Renewable Energy Policy, which foresees the payment o f a single energy charge based on the "pay-as-use" principle. 44. UETCL would then sell the purchased power to Umeme, which distributes the bulk supply to the national grid. In a structure where REA would participate, parts of the power generated at the new power station would likely be used by new consumers living along the power station's interconnection line to the main grid. As for the grid-extension schemes, REA would concession the operation and maintenance o f this distribution infrastructure to a private sector entity which could (but does not have to) be identical to the private investor o f the power station. The concessionaire o f this extended grid would sign a power sales agreement with UETCL including certain wheeling charges payable to Umemeby UETCL. 45. The two forms o f subsidies (subsidized concession fee and reimbursement o f pre- financed connection subsidies) will be the same as for the other two schemes, explained above. Key parameters of the financial analyses to be performed: 46. For all the proposed rural electrification schemes described above, GoU and REA are committed to only support grid-extension schemes that meet agreed criteria o f financial viability. It has therefore been agreed that REA on behalf of GoU will submit to IDA a comprehensive financial feasibility report for each investment scheme that will involve proceeds from this APL. The submission of such a report will become due when REA will request the Bank's No Objection on the procurement o f the proposed transmission and distribution investments. 98 47. It is currently foreseen that for at least the first two projects for each type of investment scheme, REA will be required to submit such a financial feasibility report for prior review and the Bank's No Objection. Depending on the outcomes o f those initial assessments, the Bank will consider changing this requirement to a post reviewmechanism. 48. Project level analysis It i s important to note that this project level financial analysis will not take into account the capital cost subsidy funded by REA in form o f the grid infrastructure procured by REA and concessioned to the private sector investor. Only investments funded by the private investor will be reflectedinthe financial feasibility study. 49. The private grid operating company bears the main commercial risk in all three investment schemes since it i s responsible for the revenue generation o f the project (through commercialization o f the distributed power) and collection o f the bills from end consumers. The company also has to service the most important operating costs in the form o f power purchases from UETCL (in the case o f grid-extension and mini-hydro schemes) and from the independent power generator (inthe case o f isolated mini-grids).The technical and commercial experience o f the private investor therefore becomes crucial to ensure that it is able to manage those commercial risks most efficiently and ensure financial sustainability. The financial feasibility study therefore has to include an assessment o f the private investor's technical and commercial expertise to carry out such investment schemes. 50. The other important factor in the assessment o f the financial feasibility o f the different investment schemes i s the adequate supply o f financial resources in form o f equity and debt to the grid-operating entity at the beginning of the operation. A reputable commercial bank or a financier o f the investor company will have to demonstrate the creditworthiness o f the investor and its capacity to raise the financial resources required for the implementation of the project. Such a corporate financial analysis will include an assessment o f the investor's annual reports o f the last three years, including its balance sheets, profit and loss account and cash-flow statements. The analysis should demonstrate the investor company's ability to sustain and service the financial obligations arising from the investment scheme considered under this project. 51. Therefore at the project level the financial analysis will present the valuation o f financial benefits and costs o f the project in form o f a discounted cash-flow analysis. The financial viability of each investment scheme will be determined from the "all capital" viewpoint. This meansthat the analysis looks at the discounted returnsto all real investment flows (except for the REA capital subsidy) for the project as a whole, irrespective of whether these come from equity or from loans. Under this approach a project will be financially sustainable when the NPV i s greater than zero using the weighted average cost o f capital (WACC) o f the investor as the discount rate. 52. The WACC is computed usingthe following formula: WACC = E x Re + Dx Cd Where E = percentage o f equity investment to total capital funds (assumed at 25 percent) 99 Re =contractually agreed returnon equity (ROE) D =percentage ofdebt investmentsto total capital funds (assumed at 75 percent) Cd = Cost o f debt 53. For analysis purposes only, the calculation o f the applicable WACC will assume a debt to equity ratio o f 75:25. The cost o f equity in each scheme will be determined by the ROE. It is currently assumed that REA in each scheme will select the private concessionaire through a competitive bidding process and one o f the main selection criteria will be the lowest ROE proposal. It i s expected that the ROE will be fixed during the entire time o f the concession thus puttinga cap on this cost item. The cost o fdebt is the bank loan's interest rate. 54. To ensure the robustness o f the project's financial projections the financial feasibility study should also include a sensitivity analysis on key risks affecting the financial performance o f the project. For each type o f scheme the sensitivity parameters may change slightly depending on the infrastructures involved. To determine the key parameters the analysis will find out what parameter(s) have the strongest effects on the profitability o f the project for a given percentage variation and test the sensitivity o f calculations to these variations for, inter alia, variations in capital cost and load forecast, delay in the implementation of the projects, increase in interest rate, and lower than anticipated levels o f collections or higher losses. 55. Analysis of proposed subsidy levels and their sustainability. The experience of ERT I has shown that the provision of transmission and distribution assets in grid extension schemes and the provision o f generating assets in independent grid rural areas is ordinarily not commercially feasible for the private sector without subsidy assistance. This i s mainly due to: (i) significant project development costs that are proportionately high given the relatively small project sizes; and (ii)affordability constraints that limit the amount o f revenue inflows to cover the investment costs. 56. Based on this previous experience, only a proportion o f the investment cost related to grid extension schemes and independent grid projects are expected to be supported on a commercial basis and the balance o f the full investment cost, being the component not commercially supportable, has to be subsidized (often described as capital buy-down) from the public sector. 57. Under ERT 11, REA proposes to support those different investment schemes by procuring and financing the transmission and distribution infrastructure, while leaving the commercially fundable investment costs to the private sector investors. To further mitigate affordability issues, REA will intervene at the end-consumer level with targeted connection cost subsidies as outlined above. 58. Because subsidies are required for the implementation o f those schemes the financial feasibility study must identify the total financial contributions by REA and GoU made on a subsidy level to the respective investment schemes. In a second step, the financial feasibility study would have to justify the amount of subsidies based on REA'Sassumptions on tariff affordability levels in each scheme and levels of assumed consumption. REA should also demonstrate its ability to finance the subsidies and the impact o f those schemes on its financial 100 situation. With regard to the direct subsidies on the connection fees, REA has agreed on a mid- term of this project a review of the subsidy arrangement. 59. Objectives and Strategies of Uganda Renewable Energy Policy Table 17: Uganda Renewable Energy Policy Objectives and Strategies Policy Objectfve Strategies 1. Publish a standardizedpower purchase agreement (PPA) with feed-in-tariffs. 2. Put in place legislationand regulations to promoteappropriateuse ofRETSinother sectors. Develop appropriate regulations for grid 3. connectionsandwheeling ofelectricity generated from renewableenergy. 4. Establish a NationalEnergy Committee. 1) Maintain and improve the 5. Establisha decentralizedcoordinationframework to responsiveness.ofthe legal support the promotionofrenewableenergy investmentsat and institutionalframework the lowestlevel. to promote renewable 6. Createbotha RenewableEnergyDepartmentand an Energy energy investments. Efficiency and Conservation Department at the MEMD Attract qualifiedpersonnel into the sector so as to support 7. Renewable Energy Investments. 8. Integrateenergy issues intonon-energysector policiesand planningfor sustainable energy service provision. 9. Introducea sector-wideapproach(SWAP) inenergy planning and implementation. 2) Establishan appropriate Implement,through public-private partnerships financingand fiscal policy 1. (PPP), innovativefinancing mechanisms, including framework for RET investments targeted subsidies. 2. Introducefiscal measures that favor renewable energy investments. 3. Implement innovativerisk mitigationmechanisms andcredit enhancementinstruments. 4. Enhancesocialservice provisionthroughgrant financing of renewableenergy projects. 5. Developfinancingschemes adaptedto localneeds, traditions,and experiences. 101 Take advantage ofthe Clean Development Mechanism, EmissionTradingand Joint ImplementationProgrammesunderthe Kyoto Protocol. PolicyObjective Strategies 7. Determinethe feed-in-tariffsfor renewableenergy projects periodically. 3) Mainstreampoverty eradication, 1. Study the linkages andmechanismsbetweenpoverty equitabledistribution, socialservices and eradication, gender, andrenewableenergy gender issuesinrenewable energy 2. Sensitize stakeholderson the linkages betweengender, strategies. poverty, and renewable energy. 3. Implement a comprehensive integratedrenewableenergy, gender sensitive, povertyalleviationplan. 4. Reinforce the gender relatedbenefits ofrenewableenergy in PEAP. 5. MainstreamHIV/AIDS issues inrenewableenergyplans, projects and activities 4) Acquire and disseminate 1. Continuouslyacquire dataonthe renewableenergy resource information in order to raise public availability. awareness and attract investments in 2. Develop the capacity to processthis data. renewableenergy sources and 3. Developandpromoteknowledgeand exchangeof information technologies. on renewable energy to all stakeholders. 4. Promote and stimulate renewable energy and energy efficiency marketsthrough informationdissemination. 5. Incorporaterenewable energy education into the curriculaof educationalinstitutionsat all levels. 6. Developand implementa comprehensive capacity building programmefor the renewable energy sub-sector. 102 5) Promote research and development, 1. PromoteappropriateR and D and local manufacturing international cooperation, technology capability inrenewableenergy technologies. transfer and adoption and standards in renewable energytechnologies. 2. Allocate funds for R and Dinrenewableenergy technologies. 3 . Set up aResearchand DevelopmentDivision under the RenewableEnergy Departmentto liaise with other institutions on R and D in RETS. 4. Supportthe research initiatives intertiary institutionsand amongother stakeholders. 5. Developandadapt RETstandardsandcertification processes. 6. Identify and enhance mechanismsto gain from technology skills transfer and from international experience. Policy Objective Strategies 6) Utilize biomassenergy efficiently so as to 1. Promote, incollaborationwith NFA andMAAIF, the contribute to the growing of energy crops. management ofthe resourceinasustainable 2. Provideincentivesfor farmers to establishcommercial manner. woodlots. 3. Integrate biomass energy production and efficient utilization and its impacts on climateand healthinto the formal education system. 4. License charcoalproductionandtransportation and encourage commercial production in an efficient and sustainablemanner. 5. Promotethe productionanduse ofbiogasat both householdlevels and largehndustrial scale. Scale up householdbiogas units to 100,000 by 2017. 6. Scale-upthe adoption ofefficientcharcoal fuel stoves from 20,000 currently to 2,500,000 householdsby 2017. 7. Increase the adoption of efficient fuelwood stoves from 170,000 currentlyto 4,000,000 by 2017. 8. PromoteintefieVintertechnology substitutionin households, commercial buildings and industry. 9. Promoteefficiencyinintensivewood burningindustries. 10. Promotebiomassfired cogenerationin industries and institutions. 11. Offer trainingopportunities for "Juu Kuli" artisansfor manufacture, installationand maintenanceof efficient cook stoves. 12. License encroachednationalforest reservesto investors. 103 7 ) Promotethe sustainable 1. Developappropriatelegislationfor the use ofbiofuels. production and utilization of 2. Adopt appropriateinternationalstandardsfor the manufactureand biofuels blendingofbiohelswith petroleum fuels. 3. Licensecompaniesto blendupto 20%biofuels into gasoline and diesel. 4. Providefinancial incentivesfor the productionofbiofuels. 5. Set up abiofuelsstandard testing facility at the UNBS for testing and monitoring purposes. 6. Monitor the standards o f biofuels producers 104 5 Policy Objective Strategies 7. Sensitizethe public and stakeholdersonthe use of the biofuels. 8. Facilitate research on biofuels. 8) Promotethe conversion of municipal 1. Provide incentivesfor the conversionof wastes to energy. Put inplace fiscal measuresthat will and industrial waste to energy 2. Discourageopenburningor disposalofwastes without extracting their energy content. 105 Annex 10: SafeguardPolicy Issues UGANDA: Energy for Rural TransformationI1 1. The project supports interventions designed to increase access to modem energy, informationand communication technologies inUganda. The project is expectedto have positive overall environmental and social impacts through promoting access to renewable energy and energy efficiency. Some project activities, however, may have localized adverse environmental impacts, e.g. changes inhydrology, vegetation clearance or soil erosion through construction and operation of small hydropower. Project activities may also entail land taking or affect access to resources, leading to involuntary resettlement. Safeguards preparationand disclosure 2. The ERT I1project activities may have limitedadverse environmental and social impacts, triggering the OP/BP 4.01 on Environmental Assessment (EA) as well as policies on Natural Habitats (OP/BP 4.04); Involuntary Resettlement (OP/BP 4.12); Physical Cultural Resources (OP/BP 4.11); Forests (OP/BP 4.36); Safety of Dams (OP/BP 4.37); and Projects on International Watenvays (OP/BP 7.50) as summarized inthe table below. The project is rated as environmental assessment category "B". SafeguardPolicies Triggeredby the Project Yes No Environmental Assessment (OP/BP 4.0 1) Applicable because the programwill support investmentswith potential adverse environmental impacts. Since their locationcannot be identified ex-ante, the safeguardinstrument used is the ESMF.For activities with significant impacts, specificEAs and EMPs will be prepared. Natural Habitats (OP/BP 4.04) Applicable because some subprojects may adversely impact on natural habitats. The ESMFs will be usedto screenprojectactivities for such impacts. Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Applicable because project investmentswill involveconstruction and therefore may affect physicalculturalresourceseither through known site characteristics, or through `chance finds.' Involuntary Resettlement (OP/BP 4.12) Applicable becausethe projectmay support interventions that could entail landtakingor limitingaccess to landand other resources.An W F has been developed in order to address this policy. Indigenous Peoples (OP/BP 4.10) Forests(OP/BP 4.36) Applicable because the project investmentsmay have adverse impacts on forests. The ESMFwill be usedto screenproject activities for such impacts. Safety of Dams (OP/BP 4.37) Applicable because the projectmay support mini-hydropower developmentthat would involve small dams. 106 Projects inDisputedAreas (OP/BP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) Applicable becausethe projectmay support mini-hydro power development that may involveinternationalwaterways. Riparianhas [XI [I beenissued. 3. To ensure compliance with these policies, Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF) were prepared, and a Riparian Notification issued. The ESMFwas cleared by the Uganda National Environmental Management Authority (NEMA). The ESMF and RPF were disclosed at the World Bank's Infoshop on October 31, 2008, and in country on November 10, 2008. The ESMF guides the screening o f project investments for potential adverse environmental and social impacts and triggering o f other safeguard policies as well as preparation o f detailed environment assessments and management plans. Main features of the safeguard documents Environmental and Social Assessment Framework 4. The OP 4.01 is applicable because the program will support renewable energy power generation investments under the component 1. Since the location and details o f these activities cannot be determined at appraisal and assessed for their environmental impacts, the safeguard instrument usedto ensure compliance with OP 4.01 i s the ESMF. Followingthe screening o f all project investment activities, activities with significant potential environmental impacts, such as small hydropower plants will be subject to site specific EAs and EMPs that will be prepared duringproject implementation. 5. The ESMF for ERTP I1 continues to utilize procedures and practices established and successfully implemented during ERT I,and reflects consultations with the project stakeholders. ESMF guides the implementing agencies to identify, assess and mitigate potential negative environmental and social impacts o f subprojects, and to ensure that proper mitigation measures and monitoring plans are inplace, and budgeted for. The ESMFs guidelines and procedures are consistent with the national environmental act o f Uganda andthe World Bank safeguard policies. 6. The ESMFoutlines an environmental and social screeningprocess for subprojects, which will enable the national and local governments and communities to identify potential environmental and social impacts o f the proposed project activities and to address them by designingmitigation, prevention, andmanagement measures. To ensure that negative impacts are minimized or eliminated, the ESMF requires the inclusion o f mitigation measures in the design o f subprojects prior to implementation. The screening process has been developed as the locations and types o f subprojects are not yet defined, and therefore potential impacts cannot be precisely identified. 7. The ESMF includes the following: (a) guidance on preparation of comprehensive checklists o f potential environmental and social impacts and their sources; (b) systematic procedures for participatory screening .of subproject sites and activities and the environmental By supporting the proposedproject, the Bankdoes not intendto prejudicethe final determination ofthe parties' claims on the disputed areas 107 and social considerations; (c) guided approach for forecasting the main potential environmental and social impacts o f the planned project activities; (d) institutional arrangement for mitigating, preventing, and managing the identified environmental impacts; (e) typical environmental management planning process for addressing negative externalities in the course o f project implementation; (f) monitoring system for implementation o f mitigation measures; and (g) outline o f recommended capacity building measures for environmental planning and monitoring o f project activities. Natural Habitats 8. The ESMF also ensures compliance with policy on Natural Habitats, OP/BP 4.04 which i s applicable because some ERT I1interventions are likely to impact on the local area ecosystem, and habitat aquatic and terrestrial species. The ESMF will address issues pertaining to this policy. It will ensure that ERTP I1 will not finance activities that are likely to degrade critical natural habitats. Rather, ERT I1 will support interventions that contribute to the reducing degradation pressures on natural habitats, such as promoting energy efficiency and renewable sources o f energy. Forests 9. Some project investments, for example the construction of electricity transmission or distribution lines, may have inimpact on the health and/or quality o f forests. The ESMF screens for potential adverse impacts on Forests under OP/BP 4.36. It requires the project sponsor to assess the potential impact and to incorporate appropriate mitigation measures to minimize impacts. The project will not finance investments which require construction incritical forests. CulturalResources 10. The project will support small-scale construction in a variety o f areas. It i s possible that construction may affect known cultural resources or may result in `chance finds' of cultural resources. The ESMF provides that project sponsors must take appropriate action to meet the Bank's requirements of cultural property protection. Such action shall range from full site protection to selective mitigation including salvage and documentation in places where a portion or all o f the physical cultural resources may be lost. Safety of Dams 11. With respect to Safety o f Dams, the policy applies because the project may involve the support o f mini-hydro power projects that would involve small dams less than 15 meters in height. Incase small dams will be financed during project implementation, the design criteria, specifications, and other relevant documents will be submitted to the Bank for its prior review. Further, should any subproject be dependent on one or more dams, arrangements acceptable to the Borrowers and the Bank will be developed and implemented to ensure compliance with OP 4.37. These will include, if required by the Bank, an inspection and comprehensive safety evaluation of the dams, and development o f an appropriate emergency preparedness plan. The ESMFprovides screening guidelines for any such subprojects. 108 ResettlementFramework 12. The OP/BP 4.12 i s applicable because ERT I1will support interventions in selected areas that may result in land taking or restriction o f access to resources by local communities. Involuntary resettlement policy i s triggered not only when land acquisition i s evident, but also where there i s no physical relocation, such as project activities impact assets, restrict access to other natural resources, and/or negatively impact on livelihoods. Since the interventions in Component 1 are not determined in advance and by appraisal, a Resettlement Policy Framework (RPF) has been prepared and disclosed. The RPF document outlines the principles and procedures for resettlement and/or compensation o f subproject-affected people, and establishes standards for identifying, assessing and mitigating negative impacts o f project supported activities. Inaddition, the RPF will guide the preparation, and implementationo f the resettlement action plans (RAPS) for each individual subproject that triggers the involuntary resettlement policy (OP/BP 4.12). 13. The resettlement action plans would be prepared in consultation with the affected individuals and communities. Resettlement assistance and compensation for impacts will also be determined through the same consultative process to ensure that no one i s left worse off as a result o f the project. RAPs preparation and implementation are based on existing laws and regulations o f Uganda, as well as the World Bank policy OP/BP 4.12. The stakeholder groups like the local government institutions, private sector and CSOs where necessary will be provided with training necessary to equip them with the skills to screen subproject activities for impacts, prepare RAPs, and implement activities set out in the RPFs and subsequent RAPs. The national and local level institutions will undertake both desk and field appraisal o f the planned interventions, and approve RAPs prior to commencement o f the subprojects. Similarly, all compensation will be completed prior to commencement of the subproject. Compensation and resettlement issues will be fwnded from government counterpart funds or sectoral budget. 14. The grievance mechanisms have been well laid out in the RPF, and they utilize the existing systems and structures from the lowest levels through local governments. If all these channels o f handlinggrievances fail then the aggrieved individuals can resort to Uganda's courts o f law. Riparian Notification 15. The project may support mini-hydro power stations, which may be located on rivers that flow out o f Uganda into other territories (i.e. international waterways). To ensure that riparian countries on the international waterways potentially affected by the project through changes in water quality or quantity are adequately informed o f project activities during project preparation, the Government issued a RiparianNotification to all potential downstream riparians on February 12, 2009. The notification period lapsed on March 13, 2009. N o response to the Notification was received. There are no unfavorable impacts expected by this project. SafeguardsProvisionsin the LegalAgreement 16. Borrower commitments to fully implementthe provisions o f ESMF and RPF are included as a specific covenant inthe financing agreement. 109 Annex 11:ProjectPreparationand Supervision UGANDA: Energyfor Rural TransformationI1 1. The key dates for project processingare given below: Planned Actual PCN review 7125108 7/3/08 Initial PID to PIC 8/29/08 11/19/08 Initial ISDS to PIC 8/29/08 11/19/08 Appraisal 2/03/09 1/26/09 Negotiations 2112/09 2113/09 Board/RVP approval 3131/09 Planneddate of effectiveness 6130109 Planneddate of mid-termreview 7/31/11 Plannedclosing date 6/30/13 Key institutions responsiblefor preparation of the project: Ministry ofEnergy andMineral Development MinistryofFinance, Planning, andEconomic Development Ministry of Water and Environment Ministry of Education and Sports Ministry of Health MinistryofAgriculture, Animal Industries, andFisheries Ministryof Local Government Rural Electrification Agency Uganda Communications Commission Bank of Uganda Private Sector Foundation Uganda 2. Bank staff and consultants who worked on the project included: Name Title Unit Paul Baringanire Power Engineer AFTEG Mary Bietkerezo Sr. Social Development Specialist AFTCS Howard Centenary Procurement Specialist AFTPC Malcolm Cosgrove-Davies Lead Energy Specialist AFTEG Martin Fodor Sr. Environmental Specialist AFTEN Richard Hosier Sr. Environmental Specialist ENVGC Paul Kamuchwezi Financial Management Specialist AFTFM Agnes Kaye Program Assistant AFMUG Anta LoumLo Language Program Assistant AFTEG SubodhMathur Economist, Consultant AFTEG Marjorie Mpundu Counsel LEGAF 110 Patrick Okecho Counsel LEGAF Bobak Rezaian Sr. Energy Specialist AFTEG Robert Schlotterer Financial Analyst AFTEG Luis Schwarz DisbursementOfficer LOAFC Peter Silarzsky Sr Economist CITPO Janine Speakman OperationsAnalyst AFTEG Kameel Virjee Financial Specialist ETWAF 3. Bank funds expendedto date on project preparation: 1. Bank & GEF resources: $287,000 2. Total: $287,000 4. Estimated Approval and Supervision costs: (a). Remaining costs to approval: $10,000 (a). Estimated annual supervision cost: $200,000 111 Annex 12: Documents in the ProjectFile UGANDA: Energy for Rural Tra,nsformationI1 1. Uganda -Indicative Ruralelectrification Master Plan, MEMD, June 2007 2. Uganda- Evaluation of the Rural Electrification Framework and Institutions, MEMD, September2008. 3, Uganda-Energy for Rural Transformation Project Assessment, MEMD, September2008. 4. Uganda Health Sector Strategic Plan2005/06-2009/10, MoH, November 2004. 5. Uganda Communications Commission Strategic Plan 2008-2013, UCC, April 2008. 6. Draft Revised Uganda Education Sector Strategic Plan, 2007-1015, MoES, September 2008. 7. Resettlement Policy Framework for ERT 11, REA, October 2008. 8. Energy for Rural transformation Environmental and Social Management Framework, REA, December2006. 9. The Solar PV Targeted Market Approach for Uganda Volume 1-3, REA, March 2007. 10.Uganda Water Component for Energy for Rural Transformation Project-Monitoring of Reference Schemes, DWD, June 2008. 112 Annex 13: Statementof Loans and Credits UGANDA: Energyfor Rural TransformationI1 Differencebetween expectedand actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PI10207 2008 UG:Programfor Control of Avian Influ 0.00 10.00 0.00 0.00 0.00 10.03 0.00 0.00 PI01231 2008 UG-PRSC 7 (FY08) 0.00 200.00 0.00 0.00 0.00 201.38 0.00 0.00 PO90867 2008 UG-Local Govt Mgt Svc Del Pjt (FY08) 0.00 55.00 0.00 0.00 0.00 55.82 2.50 0.00 PO78382 2008 UG-KampalaInst & lnfrast Dev Prj 0.00 33.60 0.00 0.00 0.00 34.99 2.70 0.00 (FY08) PO69208 2007 UG Power Sector Dev. Project (FY07) - 0.00 300.00 0.00 0.00 0.00 229.49 69.71 0.00 PO86513 2006 UG-MillenniumScience Init (FY06) 0.00 30.00 0.00 0.00 0.00 29.07 1.29 0.00 PO50440 2006 UG-Pub Serv Perform Enhance (FY06) 0.00 70.00 0.00 0.00 0.00 76.81 0.00 0.00 PO74079 2005 UG-Road Dev APL 3 (FYO5) 0.00 107.60 0.00 0.00 0.00 91.54 49.47 61.82 PO83809 2005 UG-Priv Sec Competitiveness 2 0.00 70.00 0.00 0.00 0.00 64.28 53.90 0.00 PO79925 2004 UG-Natl Re Dev TAL (FY04) 0.00 25.00 0.00 0.00 0.00 17.86 13.92 7.57 PO65437 2003 UG-PAMSUSIL (FY03) 0.00 27.00 0.00 0.00 0.00 8.57 4.46 0.00 PO02952 2003 UG-N UgandaSoc Action Fund (FY03) 0.00 100.00 0.00 0.00 0.00 1.96 -18.38 -18.38 PO69996 2002 UG-Energy for RuralTransform (FY02) 0.00 49.15 0.00 0.00 0.00 15.79 5.90 -12.16 PO44695 2001 UG-Nat Agr Advisory Srvcs SIL (FYOI) 0.00 45.00 0.00 0.00 0.00 33.94 22.61 0.00 PO50439 2001 UG-Priv & Utility Sec Reform(FYOI) 0.00 48.50 0.00 0.00 12.14 14.08 17.22 11.72 PO73089 2001 UG-EMCBP SIL 2 (FYO1) 0.00 22.00 0.00 0.00 0.00 1.83 -1.24 -1.01 PO70627 2001 Regional Trade Fac.- Uganda 0.00 20.00 0.00 0.00 0.00 8.78 5.62 0.00 PO59127 1999 UG-Agr Rsrch& Training SIL 2 (FY99) 0.00 26.00 0.00 0.00 0.00 11.72 -2.04 4.22 Total: 0.00 1,238.85 0.00 0.00 12.14 907.94 227.64 53.78 UGANDA STATEMENT OF IFC's Heldand Disbursed Portfolio InMillions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1996 AEF Agro Mgmt 0.26 0.00 0.00 0.00 0.26 0.00 0.00 0.00 1992 AEF Clovergem 0.84 0.00 0.00 0.00 0.84 0.00 0.00 0.00 1999 AEF Gomba 0.45 0.00 0.00 0.00 0.45 0.00 0.00 0.00 1998 AEF White Nile 0.10 0.00 0.00 0.00 0.10 0.00 0.00 0.00 2005 DFCU 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1998 Tilda Rice 0.48 0.00 0.00 0.00 0.48 0.00 0.00 0.00 2005 UMU 1.oo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 13.13 0.00 0.00 ' 0.00 12.13 0.00 0.00 0.00 113 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2002 Bujagali 0.07 0.00 0.00 0.04 Total pendingcommitment: 0.07 0.00 0.00 0.04 114 Annex 14: Countryat a Glance UGANDA: Energyfor Rural TransformationI1 Sub- POVERTY and SOCIAL Saharan Low. Uganda Afrlca Income Development dlamo nd' 2006 Population, mid-year(miliions) 29.9 770 2,403 GNIper capita (Atlas method, US$) Lifeexpectancy 300 842 650 GNI(Atlas method, US$ billions) 9.0 648 1562 Average annual growth, 2000.06 Population(?Q 3.4 2.4 19 Laborforce (%) 3.1 2.6 2 3 GNI Gross per w a r y M o s t recent estlmate (latest year avallable, 2000-06) capita enrollment Poverty (%of population belownational po vertyline) 36 Urbanpopulation (%oftotalpopulation) 0 36 30 Lifeexpectancyat birth (pars) 50 47 59 Infant mortality(per1OOOllvebirths) 79 ' 9 6 75 Child malnutrition(%ofchildren under5) 23 30 Access to improvedwatersource Access to an Improvedwater source (%ofpopulation) 60 56 75 Literacy (%ofpopulation age #+j 67 59 61 Gross primaryenrollment (%of schooI-agepopulation) 18 92 Q2 -Uganda Male tB 98 a8 __Lo w-incomegroup Female 18 86 96 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986 I996 2005 2006 Economic ratloa' GDP (US$ billions) 3.9 6.0 8.7 9 3 Gross capital formatloniGDP 8.4 20.2 212 24 9 Eqorts of goods and servicesiGDP Trade T2.8 a.0 0.1 0 8 Gross domestic savingslGDP 8.0 8.7 7.1 7 9 Gross national savings/GDP 8.2 5.1 a.1 112 Current account balancelGDP 0.0 -8.3 -Q.2 -115 Interest payments/GOP Domestic Capital 0.6 0.6 0.4 Total debt/GDP savings formation 36.0 610 511 Total debt sewice/exports 44.1 8.6 a.7 Presentvalue of debtlGDP 23.7 Presentvalue of debtlexports 128.5 indebtedness 1986-96 1996-06 2001 2006 2006-10 (averageannualgrowth) GDP 6.7 5.7 6.6 5.3 5.7 -Uganda GDP percapita 3.1 2.3 2.9 15 3.4 Low-incomegroup Eqc~rtsof goods and services 6.6 7.1 4.4 4.0 8.6 STRUCTURE of the ECONOMY 1986 1996 zoos 2006 Growth of capltal and GDP (%) (%of GDP) Agnculture 566 451 32 7 317 30 T industry a2 8 2 24 8 24 6 20 M anufactunng 6 4 7 9 9 2 8 6 10 Sewices 332 387 42 5 43 7 0 Householdfinal consumption expenditure 850 795 78 5 77 6 .10 Generalgov't final consumption expenditure 9 0 ne I44 144 Imports of goods and services 5 2 I 234 272 30 7 -GCF d G D P 1986.96 lS96.06 2005 2006 (averageannualgro wth) Growth of exports and imports ( O h ) Agriculture 42 4 2 5 1 5 0 30 industry Q 5 7 7 0 1 3 4 20 M anufactunng 116 7 2 ni -16 services 7 6 7 4 90 9 7 10 Householdfinal consumption expenditure 6 0 5 6 93 38 0 Generalgov't final consumption expenditure 56 57 98 9 6 01 02 03 04 05 06 .10 Gross capital formation 7 8 6 8 112 20 5 Imports of goods and services 54 7 2 226 0 6 Note 2006data are preliminaryestimates This tabiewas producedfrom the Development Economics LDB database 'Thediamonds showfourkey indicators inthecountry(in boid) comparedwithits Income-groupaverage ndata are missing the diamondwli be incomplete 115 B A L A N C E o f PAYMENTS 1986 1996 2006 2006 (US$ millionsj lcurrent account balance to GDP (K) 'Evorts of goods andservices 369 726 1151 1266 0 imports of goods and services 446 1601 2,290 2,644 Resourcebalance -57 -875 -1QQ -1378 Net income -44 -46 -157 -150 5 Net current transfers 0 1 421 4 9 464 Current account balance 0 -500 -887 -1074 -10 Financingitems (net) 39 573 1P7 1176 Changes innet reserves -39 -73 -240 -n 2 1-75 Memo: ~~ ReSeNeSincluding goid (US$ millions) 86 480 1.087 1025 Conversionrate(DEC,locaUUS$j n g IOP8 1,737.2 1825 1 EXTERNAL DEBT and RESOURCE FLOWS I986 IS96 2006 2006 /US$ milhons) Composition o f ZOO6 debt (US$ mill.) Totaldebt outstanding and disbursed 1414 3,666 4,463 iBRD 43 0 0 0 I F 27 0 81 IDA 370 1849 3,141 436 Total debt service 771 148 772 iBRD 5 0 0 0 IDA 4 21 45 40 Composition of net resource flows Official grants 82 336 769 Official creditors 121 177 P8 Pnvate creditors 35 -7 3 Foreign direct investment (net inflows) 0 P 1 257 Portfolio equity(net inflows) 0 0 2 World Bank program Commitments 0 42 143 4 A . IBRD E-Bilderal Disbursements 62 P 4 03 93 B .IDA D. Other mltilaterd F .Priva(e Pnncipairepayments 2 8 21 24 C - IMF G- Shalt-ten Net flows 60 t6 m 68 interest payments 6 Q 24 15 Net transfers 54 0 3 86 53 Note This tabiewas producedfrom the DevelopmentEconomics LDB database 9/28/07 116 Annex 15: IncrementalCost Analysis UGANDA: Energyfor Rural TransformationI1 Introduction 1. The Uganda ERT I1project represents the second phase of the Adaptable Program Loan (APL) initiated as part of ERT I.It will build upon the achievements of ERT I,and seek to meet the goals established for ERT I1underthe initialprogrammatic framework established for ERT I. As a result, the following analysis summarizes the results of ERT Ias these have now become the baseline for the intervention upon which ERT I1must build. The incremental rationale for ERT I1is summarizedinthe following discussion. Baseline 2. At the time of the formulation of ERT Iin2002, there were little or no renewable energy installations in Uganda, apart from the traditional hydro installations and a small number of PV systems. The development objective of ERT Iwas to provide energy for Uganda in key sectors that would lead to the transformation of the rural economy. From a global environmental perspective, key activities were designed to lay the foundation for a scaling up of renewable energy investments through development of a renewable policy and regulatory framework, the stimulation of investments on on-grid renewable generation, and the support to rural electrification through the stimulation of the market for solar photovoltaics (PVs), initially focusing on institutional applications. 3. Without the ERT program, it is safe to say that Uganda would not have developed a renewable energy policy framework; it would still have very few investments in new renewable energy; and the PV industry would still be very small with limitedreach. Inthe absence of ERT 11, it is likely that the situation will remain static-few, if any, new renewable energy investments will be made and the PV marketwill likely stagnate. Thus, there remains a need for continued GEF support to ERT activities under Phase 11. Achievementsof ERTI 4. Prior to defining the goals for ERT 11, it is important to clarify the concrete achievements under ERT I.As highlighted inthe body of the brief, the Government of Uganda has adopted a renewable energy policy and decided to promote private investments in renewable energy. Specifically, the "trigger" for moving to ERT I1 was the development of at least 15 MW of renewable energy generation capacity. The installations under ERT Iare documented in Table 16 below. These data demonstrate that over 15 MW of renewable energy capacity has already beenor is inthe process of being commissioned inUganda with the support of the project. Thus, 15 MW of renewableelectricity capacity will serve as abaseline upon which ERTmust build. 117 Table 18: RenewableEnergy Generation: Grid Connected SupportedUnder ERT I Anticipated Tonnes Lifetime of Avoided Over Renewable Generation-Grid Tonnes C 0 2 Investment Lifetime of Connected M W Installed per MW-YR (yrs) Investment Kakira--0n-grid Biomass Co- - generation 12 1650 20 396,000 West Nile Small Hydro on IndependentGrid 3.5 770 20 53,900 Kisiizi-Small Independent Hydro System 0.35 770 20 5,390 Total 15.85 455.290 5. The second concrete element achieved during ERT Ifocuses on the installation and operation o f institutional and commercial PV systems. A number o f these systems were procured for the ministries o f Health, Water, and Education under support provided directly by the project. Maintenance contracts for the first five years of operation were included in the procurement contracts for these systems. Beyond these systems, an additional number of PV systems were installed independently making use o f the subsidy established under the project. All o f the installations provided with a subsidy were inspected, certified to be according to Uganda standards, and remain in operation at present. Table 19 summarizes the total number of institutional and commercial PV systems provided under the project, including those that were procuredthrough the project and those that were not. Table 19: Institutionaland CommercialPV SupportedUnder ERTIand Likely Impact Note: GHG calculations are made using coefficients developed for ERT I.In this case, all of these systems were assumedto be developed against a baseline involved mini-grid electrification with an emission factor of 210 t C/ MW-yr or 770 t CO2hlW-yr. 6. Over 2000 systems were installed, and their cumulative electrical capacity comes to over 1.2 MWp o f combined PV capacity. As ERT 1's objective was the established o f 320 kWp o f 118 PV capacity, this element o f ERT Iexceeded the goals and targets established for it by nearly a factor o f 4. 7. With respect to household PV systems, these were not given a priority under ERT Ias part of the programmatic strategy. Nevertheless, some companies that sold PV systems to households applied for subsidy support, and upon inspection and certification o f their installations, were provided with the agreed-upon subsidy. The number o f households provided with subsidies (and a few that never completed the submission of their application information) are listed in Table 20. Table 20: Household PVSystems Supported under ERT I and Likely Impact Tonnes Anticipated PV-Based KgC02 c02 Tonnes Over Electrification-Solar WP avoided avoided Lifetime of Lifetime of Home Systems # systems Installed per Wp-Yr per yr Investment Investment Small Early Systems 163 I 2282 I 2.08 I 4.74 I 15 71 Small Systems (130 II Source: PSFUPV data-base Note: GHG calculations basedupon coefficientsdevelopingduring ERT Ipreparation, for PV off-grid, it is linkedto householdfuel consumption 8.5 kg C/ Wp over 15 years of 2.078 kgC02 per Wp-yr. 8. According to PSFU records, over 3,800 household P V systems were installed during the period o f ERT I. Although there i s no reliable concerned previously installed P V systems, previous estimates would placed the total number o f household PV systems installed in Uganda at about 10,000 (not including the above). There i s no information on how many o f these other solar home systems-installed under the UNDP-GEFsupported UPPRE project and other donor- supported activities-still remain in operation. Their addition to the information in the above tables might take the estimate o f the number o f Wp installed in Uganda household installations from the figure o f 186kWp provided above to nearly 600 kWp. 9. In addition to the above results, ERT Iprovided a grant for the purchase o f 800,000 compact fluorescent bulbs (CFLs) to be disseminated throughout Uganda to electricity users in order to reduce the load requirements o f meeting the lighting demand o f the country. This activity was initiated in order to respond to changing circumstances, and inparticular, the electric power crisis in Uganda. Although the results are still being verified, it i s estimated that these bulbs will result in net reduction of 20 MW to the Ugandan system. Assuming that a MW o f electricity on the Uganda main grid requires the emission o f 1650 tomes o f C02 per year, this 119 component implementedthrough the ERT Iproject will have resulted in the reduction of nearly 53,000 tomes of C02 per year or a total of 132,000 tomes of C02 over the 4-year lifetime of the bulbs. 10. Thus, the total likely GHG effect of the project can be estimated at 475,217 tomes of C02 avoided through renewable energy development and 53,000 tomes of C02 avoided through investment in energy efficient bulbs for a total of 528,217 tomes of C02 avoided through all of the investments made under ERT I.This works out to an approximate unit abatement cost of $22/tome of C02. Rationalefor GEF Support: GlobalEnvironmentalBenefits 11. Continuing the commitment of the World Bank and the GEF to the Ugandan rural economy, ERT I1 will provide continued support to renewable and energy efficient market development in rural Uganda. Under ERT 11, the project development objective i s to increase access to energy and information and communication technologies in rural areas. The global environmental objective is to increase energy efficiency and the use of renewable energy technologies inrural Uganda, inorder to decrease present and future growth of GHGemissions. 12. As indicated earlier, without the GEF intervention through ERT I,the renewable energy market inUganda would be nowhere near its current status. Without the support of ERT 11, the market would in all likelihood not continue to grow and might actually stagnate and go into decline. Uganda's energy sector would continue to rely on traditional fuels, with increasing fractions being derived from fossil fuels and large hydro. AnticipatedResultsfor ERT I1 13. For ERT 11, as indicated inthe body of the PAD, there are two objectives that will serve as "triggers" or results-based targets to be achieved prior to movement to ERT 111. These triggers, consistent with the original specifications for the ERT APL program, are: 0 Construction of additional renewable energy power generation facilities in the range of 20-25 MW, with a GEF share in total cost of about 15-20 percent, and the rest of the financing to come from a combination o f Bank and commercial financing, with about 10M W supportedby financing sources other than GEF; and Sales of solar PV systems of 1.0 million Watt-peak beyond those paid for in ERT I, with a GEF share intotal cost of about 15-20 percent, and the rest of the financing to come from a combination of Bank and commercial financing. 14. With respect to the construction of the additional renewable energy generation capacity, this will be achieved through indirect investment support to be provided through the Credit Support Facility (CSF). The CSF is formulated around the needs of a relatively young market for independentpower generation. GEF will provide support to the CSF that will be tailored to provide a partial credit guarantee or to reduce risk premiums on behalf of renewable energy generators. 15. With respect to the PV support, the PV target was originally formulated in the program document aroundthe number of household solar home systems to be installed inUganda through 120 the project, this was converted to a Wp target consistent with the target and objective of ERT I. Thus, the objective of ERT I1is to support the installation o f 1 MWp o f solar PV capacity in households, institutions, and commercial installations. Within the PVTMA, the target for the project period is the provision o f PV systems to 20,000 households, at an average of 30 Wp each. Thus, the bulk o f the trigger target is still expected to be achieved through growth inthe market for household PV systems. 16. With respect to anticipated global environmental benefits from the project, Table 21 provides an estimate of the GHG emission reductions that are targeted under ERT 11. The estimated level o f GHG avoidance for all project activities is estimated at 248,000 tonnes over the lifetime o fthe installationsmade. This estimated total reflects a substantial increase from the estimated tonnage to be reduced from investments made during ERT I(80,000 tonnes) as a reflection o f the capacity built and the intensified focus on investments duringERT 11. Target MW Tonnes C02 Estimated Estimated Installed avoided per Tonnes C02 Tonnes C02 MW-Yr Reductions/Yr Reducedover 20 years 1) On-grid RE 25 1650 41,250 825,000 # Systems Total Wp Estimated Kg Estimated Installed Installed C02 Avoided Tonnes C02 N p - Yr Avoided over 15vears SubtotalPV -- 2,100,000 770 23,430 Systems2) Total 1 2 + -- -- 860,484 Costs of GEF Support for ERT I1 17. The total costs to the GEF o f ERTII is US$9.00 million, consistent with the agreement reached in the original APL documentation. These resources are allocated to Components 1 and 3 of the project, focusing on renewable energy development and cross-cutting renewable energy 121 support to the Ministries of Health, Education and Water. As indicated in Table 1 of the PAD, the total costs of the project-including contributions of the private sector, consumers, and other funding sources-comes to US$93 million. The GEF contribution represents less than 10 percent of the total of the activity. The contributions of the GEF to the various activities to be funded under ERT I1are listed inTable 22 below. Table22: Fundingfrom GEF and Other Sources for Uganda ERT I1 IDA GEF GoU TOTAL Project Cost By Component and/or Activity Budgeted Resources 1. RuralEnergyInfrastructure 41.0 5.7 6.7 53.4 1.1 Publicly FundedGrid RelatedPower Supply 26.6 .6.7 33.3 1.2 Off-Grid Renewable Energy Investments 7.4 2.2 9.6 1.3 Technical Assistance, Training 1.5 1.5 1.4 Credit Support Facility 3.5 3.3 6.8 1.5 Private Sector Foundation Uganda 2.0 0.2 2.2 2. InformationCommunicationsTechnologies (ICT) 8.0 0.0 1.2 9.2 2.1 Investments 7.4 1.1 8.5 2.2 Technical Assistance, Training 0.6 0.1 0.7 3. EnergyDevelopment,Cross Sectoral Links,Impact Monitoring 26.0 3.3 1.1 30.4 3.1 Energy Packagesfor Health, Water, Education 20.0 2.1 1.1 23.2 3.2 Technical Assistance, Training, Operating Costs 6.0 1.2 7.2 Total 75.0 9.0 9.0 93.0 122 Annex 16: Credit Support Facility UGANDA: Uganda: Energy for Rural Transformation I1 1. The Credit Support Facility (CSF) was set up in ERT Ias the Uganda Energy Credit Capitalisation Company Limited (UECC). However, due to various delays, it did not become operational in ERT I.The CSF's objective was to facilitate the flow o f commercial debt finance to private investments. The CSF i s superior to the conventional alternative o f an IDA refinance facility for two reasons. First, a refinance facility can mitigate only a single risk, the lender's future liquidity risk, while the CSF can address this and other risks. Second, the CSF can eventually significantly leverage IDA resources, Le., support commercial debt in excess o f the allocated IDA resources, while the refinance facility has limited leverage. Since it would take time to set up and operationalize the CSF, an IDA refinance facility was used inthe interim. 2. The Bank o f Uganda administered the refinance facility, which mitigated the lender's liquidity risk by refinancing the majority (90 percent) o f the debt extended by a participating financial institution at the point o f loan origination. The refinance facility was capitalized using IDA resources. 3. Selected financial institutions were invited to participate in the refinance scheme based on existing relationships through other finance facilities operated by the B o U (e.g. multi-sector European Investment Bank finance facility). The participating financial institutions (PFIs) availed funds from the facility at the prevailing weighted average term deposit rates as monitored by the BoU (at time o f contract). Term deposit rates were consolidated for different tenors. The funds were available either on a floating (re-set annually) or fixed basis and were disbursed in either local or foreign currency. The maximum tenor o f finance was 15 years and B o U would refinance a maximum o f 90 percent o f the total loan size. Refinance was offered at the point o f loan origination and so acted like a credit line. 4. The CSF will begin to work in ERT I1and there will be only a limited refinance facility available in ERT 11. The design of the CSF i s flexible enough to facilitate a variety of investments. However, it i s expected that in ERT I1the demand for the CSF's support will come from small power generation projects and solar PV projects. This estimate i s based on the IDA refinance experience inERT I. ERT IRefinance experience 5. Solar PV. Refinance for solar PV under ERT Iincluded funds provided to three microfinance deposit-taking institutions (MDIs).Uganda Microfinance Limited (UML) received US$297,000 for the provision o f microcredit to rural customers acquiring solar home systems. Commercial Microfinance Limited (CML) received US$297,000 for the provision o f working capital loans to solar vendors. PostBank received US$200,000 to provide wholesale funds to savings and credit cooperative societies (SACCOs). Thus far, UML has originated loans to 93 customers, C M L has provided working capital finance to three customers, but PostBank has not yet offered any loans. 6. Inall cases, the tenor of the refinance has been 10years whilst the loans provided by the microfinance institutions have been short term, This mismatch has beenjustified on the grounds 123 that the funds being made available are rolled over a number o f times by each MDI during the refinance period. Essentially, each MDI would use the liquidity to develop an internal revolving fund. 7. Small Power Projects. The refinance facility supported two projects: a cogeneration facility using sugar bagasse (sponsor: Kakira Sugar) and a mini-grid project in West Nile, WENRECO (main sponsor: Industrial Promotion Services). Lessons learned 8. The experience gained under ERT Igenerated the following issues and lessons requiring further consideration under ERT 11. 9. Low efficiency o f refinance. Although this facility allowed local banks to extend the tenor, while taking the credit risk, the refinance facility did not leverage BoU/donor resources. Since the loan i s almost fully refinanced, regardless o f whether there are actual liquidity problems in the future, the amount o f I D A B o U resources required i s equal to the amount refinanced. This un-leveraged refinance facility will not mobilize a significant proportion o f the funding requiredinthe sector. 10. Refinance does not address credit risk issues. Since the refinance facility mitigates primarily the liquidity risk, but not the credit risk, in ERT Ithe PFIs have lent to projects with well-established sponsors, for whom the credit risk i s low. The lenders remain reticent to finance projects where there are some questions about sponsor capacity and construction risks. 11. Cost of due diligence remains a barrier. The PFIs noted that they lacked detailed information on potential project sponsors' experience and capacity. The information provided by the sponsors did not provide sufficient comfort to lenders to enable them to make credit decisions, particularly with regardto disclosure o f sponsor capacity. Financiers cannot justify the due diligence requiredfor these relatively small energy projects. 12. Solar PV. The lessons from the solar finance under ERT Iare: a) The relatively low levels o f demand for solar P V credit inERT Iwas the result o f low affordability. The short duration, high cost financing offered in ERT I did not overcome the barriers posed by low levels o f income and affordability. The implication i s that the ERT project must overcome this barrier to facilitate the flow o f commercial credit. b) (b) The wholesaling o f funds by Postbank to SACCOs may not be feasible or desirable. Postbank's planned wholesaling of funds to SACCOs has not yet begun. Wider financial sector reforms are attempting to regularize the SACCOs, and it is not evident that directed wholesale finance for solar PV is in line with this wider sector reform. c) (c) There i s a possibility that funds meant for solar PV were used for other purposes. There was considerable mismatchbetweenthe tenor of the refinance and the tenor o f facilities offered by the lenders. It i s possible that the liquidity made available by the BoU facility i s being used to finance non-solar lending. In ERT 11, the on-lending 124 agreements betweenthe MDIs and the BoU should ensure that funds are ring-fenced for solar lending. Liquidity disbursements should also be made in limited tranches basedon the demand on the MDIfor solar lending products. CSF design 13. Small Power Projects in ERT 11. The refinance product offered under ERT Iwill be modified to address the issue of efficiency and credit risk, while continuing to reduce the liquidity risk. 14. Structure of financial instrument.A standby liquidity option" will be made available to PFIs under ERT I1 (using IDA and GEF funds). This will give PFIs the option of drawing down on liquidity between five and seven years from loan origination, as needed. PFIs will originate the loan on their own balance sheets, usingtheir existing liquidity. 15. The maximum loan tenors are likely to be five to seven years. However, the PFIs will structure the loan as amortizing over a longer time, with a `bullet payment' at the end of the five to seven year original loanperiod. This bulletpayment i s the amount that will be available from the refinance option fund. Since this payment will be much less than the original loan, the IDA resources will also be lower. 16. The tenor of the refinance will be less thanor equal to the original PFI loan tenor. So if a PFI offers a five-year loan initially, the option will allow for refinancing to be available at the end of that loan for a maximum of five years. That is, the refinance will be available for, at most, the same tenor as originally provided by the PFI. Further, the refinance will not be more than seven years. 17. Only a single refinance option will be offered, rather than allowing a rolling option. It would not be allowed to use the refinance option to develop new loans. This option explicitly addresses the PFIs internal refinance risk; if they are not able to use deposits or credit lines to refinance the loan, then they will have access to this standby liquidity option. It also addresses treasury management constraints that the PFIs face, which limits the ability of banks to use deposits to lendfor longer than five to seven years. 18. The borrowers will have an option of purchasing a partial risk guarantee (PRG) at the point of loan origination. This PRG will cover part of the risk during the implementation phase of the project. Ifthe credit guarantee is called, then the refinance option will be nullified subject to recovery of the amount drawn against the guarantee (counter guarantee). Initially, the PRG may be available only to PFIs purchasing the refinance option. 19. The option will be available for both Uganda shillings andU S dollar loans. 20. Pricing. The options will be priced on market-based principles. However, given the shallowness of the financial market in Uganda, direct market determination of pricing is unlikely, and analternative scheme will be developed. l 9A put option was also considered.Giventhat at the time of exercisingthe option, the asset will have been performingfor five to sevenyears, there is limitedvalue in offeringan optionto transfer credit risk. 125 21. The liquidity option will be priced using an up-front commitment fee and a second fixed fee upon drawdown. Interest charged on the refinance will be based on the market cost o f funds when the option is called. For instance, if the option i s called to refinance a floating rate interest loan the cost o f funds will be linked to one-year Treasury bond yields when the option i s exercised. Ifthe option i s on the refinancing o f a fixed interest loan, then the refinance funds will bepriced off an appropriate (of similar tenor) benchmark (e.g. five-year Treasury bond). 22. The PRG option price will reflect the relative project risk associated with planned implementation periods, project gearing ratios, etc. The detailed pricing structure will address the specific issue o f selling options with interest rates set when the option i s called (forward contract) or when the option i s sold (future contract). 23. Eligibility to participate. Eligibility o f PFIs will be determined by BoU criteria, based on existing experience and eligibility under other government refinance programs. Specifically, financial institutions that have received a satisfactory rating in accordance with BoU's prudential regulations will be eligible to participate. 24. Reserve funds needed. In order for the options to carry market legitimacy, the fund manager will ensure that sufficient cash is in escrow on the exercise date o f the option. Given the limited deal flow, especially at the outset o f the facility, diversification benefits will be limited, which means that cash-backed reserves would be prudent.The manager will use fixed deposits to reduce reserve requirements at the point o f option sale (loan origination). The fund management strategy would be expected to be risk averse, with reserve funds invested in safe instruments such as tier 1 bank fixed deposits or government bonds. 25. The manager o f the options will reserve funds based on the debt amortization schedule of the original loan. This initial reserve amount will define an upper limit to the implementation period o f the partial risk guarantee. Further, an upper limit to the available refinance for any sub- project will be set as part o f the facility operational guidelines. This will prevent a PFI from issuing, for instance, non-amortizing loans on the assumption that the entire amount will be refinanced on the option exercise date. 26. N o recourse to Treasury funds. These refinance and PRG options will be offered and managed by the UECC, with no recourse to Treasury funds. Hence, the UECC's credit quality will underpinthe value o fthe options. 27. Due Diligence. The UECC manager will perform a rapid due diligence only if the PFUproject sponsor requires a PRG. Ifonly a refinance option i s being sold, the eligibility o f the PFI will constitute sufficient appraisal, as no project credit risk will be taken by the UECC inthat case. However, all UECC-supported subprojects will be required to comply with IDA social and environmental safeguard policies as outlined inthe ESMF and RPF, and will be expected to meet economic and financial criteria as outlined inAnnex 9. 28. Solar PV Refinance. The solar refinance product under ERT I1 will focus on retail lending. For this to occur, lending products extending the tenor of loans need to be developed. Focus should be on incorporating more lenders. Given wider financial sector goals, the UECC 126 will try to use formal regulated banks that have outreach rather than unregulated informal lending institutions. 29. Refinancing under ERT I1will use largely the same instrument as inERT I,though it will be administered by the UECC. Refinancing agreementswill be strengthenedto ensure that funds mobilized are restricted to the finance of solar PV products and businesses only. Further disbursementwill be managedmore closely to ensure disbursement to PFIs will only be upon the fullutilizationofprevious tranches. 30. InstitutionalStructure. The UECC board is responsible for appointing the management of the CSF to an entity with fund managementcapacity. Inoperationalizing the UECC, the board will receive support from the PCU staff, who will assist in the procurement of the facility manager. The manager will report to the UECC board on a quarterly basis. The UECC managementwill consist of financial and energy specialists. 31. Mandate. The UECC will manage the refinance efforts under ERT 11, for both renewables and solar PV. In order to gain economies of scale and also to address information asymmetry issues, the UECC management will also provide transaction support services to project sponsors and PFIs. Transaction support will include guidance to project sponsors on packaging requirements for obtaining debt and equity finance, project credit appraisal capacity building to PFIs and linkages between project sponsors and credit enhancement facilities (e.g. GuarantCo, ATI, etc). 32. UECC's operational budget. Financial autonomy for the UECC is the final objective. However, given that the UECC is playing a market development role, it i s not expected that it will be financially autonomous basedon fees collected at the outset. Hence, ERT I1funds will be used to both operationalize and support UECC's operational budget for the period of the project. Allocated funds will be usedto provide the UECC manager a retainer for recurring management activities. For specific support to transactions or the sale of particular refinancehisk guarantee options the Manager will draw down fees based on approval by the UECC board. The UECC will increase its viability over time as refinance options are called and interest income begins to be realized. 33. Technical Assistance. Technical assistance will be provided to support the operationalization of the CSF, and to strengthenthe capacity of PFIs and CSF eligible enterprises to appraise or implementthe CSF Subprojects. CSFoperations 34. The CSF will be operated by the UECC. 35. Operations Manual. The UECC will prepare an operations manual satisfactory to the World Bank. The financial activities-liquidity option and the PRG-will be undertaken in accordance with this manual, and none of these activities will be undertaken before the manual is ready and approvedby the World Bank. No provisionof the operational manual will be amended without approval from the World Bank. 36. Among other things, the operations manual will include: 127 a) Provisions to ensure that the UECC's operations are in accordance with the requirements o f the ESMF and the RPF, as well as the World Bank's Anti-corruption Guidelines. b) Criteria, acceptable to the World Bank, for selecting the PFIs. The selected PFIs must be rated at least `satisfactory' by BoUinaccordance with BoU prudential guidelines. 37. Eligibility Criteria for CSF Subprojects. Each CSF subproject shall be eligible for financing only if the UECC and the PFI have demonstrated to t`he satisfaction o f the World Bank that the CSF subproject meets the criteria in the UECC operational manual and the conditions given below: a) The CSF subproject i s calculated to earn an economic rate o f return o f at least 10 percent and a projected debt service cover ratio o f at least 1.5. b) The CSF subproject has been prepared on the basis o f an environmental assessment satisfactory to the World Bank. The subproject must be in compliance with environmental policies and standards acceptable to the World Bank (including the Environmental and Social Management Framework and Resettlement Policy Framework), and with all applicable Ugandan laws and regulations relating to health, safety and environmental protection; and inparticular: (i) It is designed to avoid or minimize any involuntary resettlement o f persons or loss o f their income or productive capacity. However, if the proposed CSF subproject would nevertheless require any acquisition o f land that would involve any such resettlement or loss, a resettlement instrumentfor said persons: (A) has been developed in accordance with the Resettlement Policy Framework, and in a manner designed to ensure they share in the CSF subproject's benefits and to improve or at least restore their livelihoods and standards o f living in real terms relative to pre- displacement levels or to levels prevailing prior to the beginningo f project implementation (whichever is higher); and (B) has beenapproved by the World Bank. (ii) If the proposed CSF subproject is dependent on one or more dams, arrangements acceptable to the World Bank have been developed and implemented to ensure the quality and safety o f the dam and o f downstream life, property and activities, in accordance with policies and procedures satisfactory to the World Bank, including if required by the World Bank, an inspection and comprehensive safety evaluation o f the dams, and development o f an appropriate emergency preparedness plan for the dams. 38. Terms of Agreementwith PFIs. The UECC will make funds available to the PFI under terms and conditions agreeable to the World Bank. These conditions will include the following: 128 (i) ,The maximum period over which a loan or option may be offered will be equal to the amount o fterm finance available from the PFIto the eligible enterprise, but in any case not longer than seven years. (ii) Any loanto be covered by the CSF made by a PFIto a borrower for any one sub- project will be less than US$lO million, unless otherwise agreed inwriting by the UECC. (iii) Any loanto be covered by the CSF made by a PFIto a borrower for over US$250,000 shall be subject to the prior approval o f the World Bank. 39. Protection of interests. When the UECC finances a CSF subproject, the UECC will obtain rights adequate to protect its interests and those o f the World Bank, including the right to: (i) suspendorterminatetherightofthePFItousetheproceedsoftheparticipating loan, or to obtain a refund o f all or any part o f the amount o f the participating loan then withdrawn, upon the PFI's failure to perform any o f its obligations under the participating agreement; (ii) requireeachPFIto: ensure that all CSF subprojects are carried out with due diligence and efficiency and in accordance with sound technical, economic, financial, managerial, environmental and social standards and practices satisfactory to the World Bank, including in accordance with the provisions o f the Anti-Corruption Guidelines applicable to recipients o f loan proceeds; provide, promptly as needed, the resources required for the purpose; ensure that each REA eligible enterprise procures the goods, works and services to be financed out of the Approved PFI loans in accordance with established private sector or commercial practices acceptable to the World Bank; ensure that each REA eligible enterprise maintains policies and procedures adequate to enable the UECC to monitor and evaluate in accordance with indicators acceptable to the World Bank, the progress o f the CSF Subprojects and the achievement o f its objectives; ensure that each REA eligible enterprise: (1) maintains a financial management system and prepares financial statements in accordance with consistently applied accounting standards acceptable to the World Bank, both in a manner adequate to reflect the operations, resources and expenditures related to the CSF subprojects; and (2) at the World Bank's request, have such financial statements audited by independent auditors acceptable to the World Bank, in accordance with consistently applied auditing standards acceptable to the World Bank, and promptly furnish the statements as so audited to the World Bank; 129 (F) enable the World Bank and UECC to inspect the CSF subprojects, their operation and any relevant records and documents; and (G) prepare and furnish to the World Bank and UECC all such information as the World Bank shall reasonablyrequest relating to the foregoing. 40. The UECC will ensure that, except as the World Bank otherwise agrees, that the PFIs shall not assign, amend, abrogateor waive any CSF subloan agreement. 41. Operationof CSF ContingencyAccounts. The UECC will: open and maintain, on terms and conditions acceptable to the World Bank, an interest bearing dollar or Uganda shilling-denominated "contingency account" in a commercial bank acceptable to the World Bank for any standby liquidity option and/or Partial Risk Guaranteeoffered pursuant to a participation agreement; upon approval by the World Bank of a participation agreement, transfer out of the proceeds of the UECC subsidiary financing and into the relevant contingency account a,pre-determinedpercentage-basedamount deemed sufficient along with interest income to fully fund any standby liquidity option and/or partial risk guarantee; ensure that any interest income earned on principal in the contingency account i s retained in the contingency account and thereafter aggregated to principal to be usedto cover the standby liquidity option and/or partialrisk guarantee; ensure that any unused funds left over in the contingency account shall not be reallocated or otherwise disposed of until after the exercise or expiration of the standby liquidity option, or the expiration of the partial risk guarantee, but subject to full settlement of any amount due or outstanding under the partial risk guarantee, as the case may be, and inaccordance with the terms and conditions set forth inthe CSF operational manual. 42. Use of funds repaid. The GoU will ensure that any amount repaid by the CSF to the UECC shall be usedfor such other purposes as may be agreedwith the World Bank. 130 IBRD 36780 30°E 32°E 34°E 0 25 50 75 100 Kilometers S U D A N UGANDA 4°N 0 25 50 75 Miles ERT II PROJECT Moyo Moyo PROJECT COMPONENT 5: KAABONG MINI-HYDRO (MH) INVESTMENT YUMBE KOBOKO Yumbe umbe KITGUM RURAL ELECTRIFICATION GRID EXTENSION KobokoKoboko MOYO KaabongKaabong K E N Y A INVESTMENTS AdjumaniAdjumani Kitgum Kitgum MARACHA EXISTING HYDRO POWER STATIONS Arua Arua Nile ADJUMANI KOTIDO PLANNED HYDRO POWER STATIONS DIESEL POWER STATIONS ARUA Albert KotidoKotido KilakKilak GULU Achwa PADER ABIM okkO 132kV LINES Ora GuluGulu 66kV LINES Paidha AMURU AbimAbim 3.5 MW 33kV LINES Nebbi Nebbi MorotoMoroto DEM. REP. NEBBI Nile OYAM LochomanMOROTO Victoria OyamOyam LiraLira LIRA MAIN CITIES OF CONGO BulisaBulisa NATIONAL CAPITAL Waki AMURIA Apac Apac Amuria Amuria KATAKWI RIVERS 2°N 6 MW BULISA DOKOLO Nakapiripiriti Nakapiripiriti 2°N DISTRICT BOUNDARIES Buseruka Katakwi Katakwi MASINDI APAC DokoloDokolo 9 MW Lake NAKAPIRIPIRIT INTERNATIONAL BOUNDARIES Kwania Lake KABERA- Salisbury Lake MasindiMasindi Amolatar Amolatar MAIDO Opeta Soroti Soroti Lake Albert HOIMA Siti AMOLATAR SOROTI KumiKumi Lake Kyoga KapchorwaKAPCHORWA Kapchorwa HoimaHoima NAKASONGOLA Kafu KAYU KUMI NakasongolaNakasongola NGA BUKWO PALLISA SironkoSironko Nkusi Pallisa Pallisa BukwoBukwo SIRONKO NAKASEKE KAMULI KIBOGA Bujagali BUDAKA Mbale Mbale MBALEMBALE under Kamuli KALIRONAMU- KIBAALE Kiboga Kiboga KamuliKaliroKaliro TUMBA ButalejaButaleja construction Busiki Busiki BubuloBubuloMANAFWA BUNDIBUGYO Fort For Bukumi Bukumi 250 MW BUTALEJA IGANGA Portal Portal Kakumiro Kakumiro Mobuku Kayunga Kayunga IgangaIganga BugiriBugiri Tororo ororo TORORO KYENJOJO KawandaKawandaLUWERO I, II & III Mubende Mubende JINJA MUBENDE MITYANA UGANDA 28 MW KABAROLE Mityana Mityana KAMPALAKAMPALA BusiaBusia Jinja Jinja MAYUGE BUSIA Ishasha Mukono Mukono KAMWENGE Mpigi Mpigi 5.5 MW Katonga KabulasokeKabulasoke Nkenda Nkenda K E N Y A KASESE 0° Lake KIRUHURA IBANDA NkougeNkougeSEMBABULE MPIGI Entebbe Entebbe Nalubaale 180 MW 0° George WAKISO IbandaIbanda & Kiira 200 MW Lake RushereRushere MASAKA Edward BUSHENYI RUK Masaka Masaka UNGI IshakaIshaka Kalangala Kalangala MBARARA MUKONO BUGIRI RI Mbarara Mbarara KALANGALA KANUNGU RakaiRakai Rukungiri Rukungiri Isingiro Isingiro Kisiizi NtungamoNtungamo RAKAI ISINGIRO LAKE 0.03 MW NTUNGAMO KISORO Kabale Kabale KABALE Kikagati 10 MW VICTORIA Kisoro Kisoro This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Katuna Katuna Group, any judgment on the legal status of any territory, or any Bukoba Bukoba TANZANIA endorsement or acceptance of such boundaries. RWANDA 30°E Maziba 1 MW 32°E 34°E MARCH 2009 IBRD 36816 EDUCATION COMPONENT S U D A N WATER COMPONENT S U D A N YUMBE KOBOKO MOYO KAABONG KITGUM YUMBE KAABONG UGANDA K E N Y A KITGUM K E N Y A KOBOKO MARACHA ADJUMANI MOYO MARACHA ERT II PROJECT KOTIDO ADJUMANI KOTIDO PADER PADER ARUA GULU ARUA ABIM GULU ABIM AMURU AMURU DEM. REP. NEBBI OYAM MOROTO DEM. REP. NEBBI MOROTO LIRA OYAM LIRA PROJECT DISTRICTS OF CONGO OF CONGO AMURIA AMURIA BULISA BULISA APAC DOKOLO KATAKWI APAC DOKOLO KATAKWI MASINDI NAKAPIRIPIRIT MASINDI NAKAPIRIPIRIT NATIONAL CAPITAL KABERA- KABERA- MAIDO AMOLATAR MAIDO DISTRICT BOUNDARIES Lake AlbeHOIMA rt NAKASONGOLA AMOLATAR SOROTI Lake AlbeHOIMA rt SOROTI KAYUNGA KUMI KAPCHORWA KUMI KAPCHORWA INTERNATIONAL BOUNDARIES BUKWO NAKASONGOLAKAYU NGA BUKWO NAKASEKE PALLISA SIRONKO NAKASEKE PALLISA SIRONKO KIBOGA KAMULI KALIRO BUDAKA KIBOGA KAMULI KALIRO BUDAKA KIBAALE MBALE KIBAALE MBALE LUWERO NAMU- BUTALEJA MANAFWA NAMU- BUTALEJA MANAFWA BUNDIBUGYOE KABAROL TUMBA LUWERO TUMBA IGANGA TORORO BUNDIBUGYOE IGANGA TORORO KYENJOJO KYENJOJO MUBENDE JINJA MUBENDE JINJA MITYANA BUSIA KABAROL MITYANA KAMWENGE KAMPALA MAYUGE KAMWENGE KAMPALA MAYUGE BUSIA KASESE KASESE MPIGI Lake KIRUHURA K E N Y A Lake KIRUHURA K E N Y A George WAKISO George WAKISO IBANDA SEMBABULE MPIGI IBANDA SEMBABULE Lake Lake Edward RUKU MASAKA Edward BUSHENYI RUKUNG MASAKA BUSHENYI KANUNGU MUKONO BUGIRI MUKONO BUGIRI NGIRI MBARARA KALANGALA KANUNGU MBARARA KALANGALA RAKAI ISINGIRO IRI RAKAI LAKE ISINGIRO LAKE NTUNGAMO NTUNGAMO KISORO KISORO KABALE VICTORIA KABALE VICTORIA TANZANIA TANZANIA RWANDA RWANDA HEALTH COMPONENT S U D A N ICT COMPONENT S U D A N YUMBE KOBOKO MOYO KAABONG KITGUM YUMBE KAABONG K E N Y A KITGUM K E N Y A KOBOKO MARACHA ADJUMANI MOYO MARACHA KOTIDO ADJUMANI KOTIDO PADER PADER ARUA GULU ARUA ABIM GULU ABIM AMURU AMURU UGANDA DEM. REP. NEBBI OYAM MOROTO DEM. REP. NEBBI MOROTO LIRA OYAM LIRA OF CONGO OF CONGO AMURIA AMURIA BULISA BULISA APAC DOKOLO KATAKWI APAC DOKOLO KATAKWI MASINDI NAKAPIRIPIRIT MASINDI NAKAPIRIPIRIT KABERA- KABERA- MAIDO MAIDO NAKASONGOLA AMOLATAR Lake AlbeHOIMA rt NAKASONGOLA AMOLATAR SOROTI Lake AlbeHOIMA rt SOROTI KAYUNGA KUMI KAPCHORWA KUMI KAPCHORWA BUKWO NAKASEKE PALLISA SIRONKO BUKWO NAKASEKE PALLISA SIRONKO KALIRO BUDAKA KIBOGA KAYUNGA KALIRO IBUGYOE KIBOGA KAMULI KAMULI KIBAALE MBALE KIBAALE BUDAKAMBALE LUWERO NAMU- BUTALEJA NAMU-BUTALEJA MANAFWA TUMBA MANAFWA LUWERO TUMBA BUND KABAROL IGANGA TORORO BUNDIBUGYOE IGANGA TORORO KYENJOJO KYENJOJO MUBENDE JINJA MUBENDE JINJA MITYANA MITYANA MAYUGE BUSIA KABAROL KAMWENGE KAMPALA KAMWENGE KAMPALA MAYUGE BUSIA KASESE KASESE MPIGI Lake KIRUHURA K E N Y A Lake KIRUHURA K E N Y A George WAKISO George WAKISO IBANDA SEMBABULE MPIGI IBANDA SEMBABULE Lake Lake Edward RUK MASAKA Edward BUSHENYI RUKUNGI MASAKA BUSHENYI KANUNGU UN MBARARA MUKONO BUGIRI MUKONO BUGIRI KALANGALA KANUNGU MBARARA KALANGALA GIRI RAKAI RI RAKAI ISINGIRO LAKE ISINGIRO LAKE NTUNGAMO NTUNGAMO This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information KISORO KISORO shown on this map do not imply, on the part of The World Bank KABALE VICTORIA KABALE VICTORIA Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. TANZANIA TANZANIA RWANDA RWANDA MARCH 2009