US$M): Sector Board : Energy and Mining Cofinancing (US$M (US$M US$M): US$M): Closing Date : 12/31/ /31/2010.

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1 Public Disclosure Authorized IEG ICR Review Independent Evaluation Group Report Number : ICRR Project Data: Date Posted : 07/26/2012 Public Disclosure Authorized Public Disclosure Authorized Country: Tajikistan Project ID : P Project Name : Pamir Private Power Project Appraisal Actual Project Costs (US$M US$M): L/C Number: C3682; CH381 Loan/Credit (US$M US$M): Sector Board : Energy and Mining Cofinancing (US$M US$M): Cofinanciers : Aga Khan Fund for Board Approval Date : 06/27/2002 Economic Development, International Finance Corporation Closing Date : 12/31/ /31/2010 Sector(s): Power (100%) Theme(s): Rural services and infrastructure (34% - P); Pollution management and environmental health (33% - P); Infrastructure services for private sector development (33% - P) Prepared by : Reviewed by : ICR Review Group: Coordinator : Fernando Manibog Robert Mark Lacey Soniya Carvalho IEGPS1 2. Project Objectives and Components: a. Objectives: According to the Project Appraisal Document (PAD) dated May 31, 2002 (page 3): "the objective of the Project is, through private sector involvement, to improve the reliability and enhance the quantity of supply of electricity in the Gomo Badakshan Autonomous Oblast (GBAO) region in a financially, environmentally and socially sustainable way." Public Disclosure Authorized According to the Development Credit Agreement dated July 3, 2002 (Schedule 2), the project objective is "to improve quantity and reliability of supply of electricity in the GBAO region of the Borrower." The Project Paper for Additional Financing dated June 23, 2008 reiterates the PAD objective ad verbatim and indicates that "the original Project objective is still highly relevant and remains unchanged." (pages 1 and 3) This ICR Review is based on the PAD statement of the project's development objectives (PDO), which is more detailed and monitorable, and which has served as the single reference point for stating the PDO throughout project implementation, restructuring and additional financing. b.were the project objectives/key associated outcome targets revised during implementation? No c. Components: The project was expected to generate and supply electricity under a 25-year Concession awarded to a private concessionaire -- the Pamir Energy Company (PEC). It was intended that the Concession would take control over

2 the assets of the existing, publicly owned Barki Tajik in GBAO, which served around 250,000 people. The project had the following components: (a) Completion of the Pamir I Hydropower Plant to its original design capacity of 28 MW from the current 14 MW by installing units 3 and 4, along with an associated regulating structure at Lake Yashilkul (appraisal estimate and actual cost, US$5.10 million) (b) Rehabilitation of other hydro plants - Units 1 and 2 of Pamir I, Khorog, Vanj and Namangut (appraisal estimate and actual cost, US$7.50 million) (c) Rehabilitation and reinforcement of substations, transmission and distribution lines (appraisal estimate and actual cost, US$6.0 million); (d) Technical Assistance to PEC for: Project Engineering and Implementation, Operations and Management and Environmental and Social Impact monitoring and mitigation (Appraisal estimate and actual cost, US$5.80 million); and (e) Additional financing was provided to restore Pamir 1 after devastating floods (US$7.8 million estimate; US$4.95 actual) d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: The Project was expected to cost US$ 24.4 million, including supply of equipment, construction, installation, consulting services and contingencies. Interest During Construction amounted to US$ 2.0 million, for a total capital expenditure of US$26.4 million. With the Additional Financing of US$7.8 million, the total estimated cost increased to US$34.20 million in The final actual cost was lower at US$31.35 million (including interest during construction ) when a lesser amount than estimated for the Additional Financing was required. IDA's actual contribution was US$11.17 million. The International Finance Corporation (IFC) of the World Bank Group provided US$8.00 million in financing. The Aga Khan Fund for Economic Development provided US$ 8.2 million. The Borrower provided a total of US$3.98 million. After the catastrophic flooding in February 2007, the project description was revised to add Emergency Assistance, provision of goods, works and consultants services for Pamir 1 Power plant restoration and financial recovery. Additional Financing from IDA was obtained in June 2008 to finance this unanticipated cost overrun, to rehabilitate plant infrastructure, provide parts and equipment, and ensure Pamir 1 s sustained operation over the long term. The project's closing date was extended 3 times, for a total of 4 years from December 31, 2006 to December 31, 2010, as follows (the ICR does not give the dates on which the extnsions were granted ): First extension: from December 31, 2006 to December 31, 2007 (1 year) to reallocate among disbursement categories. Second extension: from December 31, 2007 to December 31, 2008 (1 year) to reallocate surplus funds from the SDR/US dollar exchange rate to support power plant restoration after catastrophic floods caused damage in February 2007, and to cover the additional time required for installation and testing. Third extension: from December 31, 2007 to December 31, 2010 (2 years) to finance the incremental costs related to the restoration of PEC operating capacity. 3. Relevance of Objectives & Design: a. Relevance of Objectives: The relevance of the project's objectives is substantial. The PDO remains relevant to the goal of the Bank s Country Partnership Strategy for FY10-13, current at project closure, of improving the reliability of electricity and gas services and increase energy support potential. The PDO also fits into the Production Block on food security, agriculture, infrastructure, energy and industry of the Bank s Poverty Reduction Strategy for The PDO remains highly relevant to the National Development Strategy for of Tajikistan, whose key priorities include improving public administration, developing the private sector and attracting investment, and developing human potential. Tajikistan s 2007 power sector strategy also aims to ensure reliable electricity supply to meet the needs of the population and productive sectors, in order to reduce poverty and sustain growth. The country s goal was to reach self-reliance by 2017 and gradually develop power exports and strengthen regional cooperation to increase electricity export revenues and generate a new source of growth.

3 b. Relevance of Design: The relevance of the project's design is substantial. The Results Framework (PAD, Annex 1, pages 43-46) was well prepared. The project objective was clear, succinct and measurable. The project's activities and policy actions are logically linked in a causal chain to the achievement of the objective. For example, the selected technical performance indicators are closely associated with the goal of improving the quantity and quality of electricity supply, while specific financial targets were linked to the goal of maintaining Pamir Energy's financial viability. The critical assumptions are well defined, notably the central importance of the Government ratifying and meeting its obligations under the Concession Agreement, and the Government's sustained support during implementation. 4. Achievement of Objectives (Efficacy): The degree of achievement of the project's development objective -- through private sector involvement, to improve the reliability and enhance the quantity of supply of electricity in the Gomo Badakshan Autonomous Oblast (GBAO) region in a financially, environmentally and socially sustainable way -- is assessed in relation to the four expected outcomes. Private Sector Involvement. Substantial. The project mobilized significant private investment of US$ 26 million in a country and region where it has been difficult to attract private investors. Pamir Energy Company (PEC) -- which is a special purpose company for the project operating the 25-year Concession -- was formed under the laws of the Republic of Tajikistan as a joint stock company, owned 70 percent by the Aga Khan Fund for Economic Development and 30 percent by IFC. The Concession Agreement, which was signed on May 24, 2002 by the Government and PEC, provides the policy, regulatory, technical, environmental, financial and operational framework for the project, both during the construction and operational phases. With the construction phase completed, PEC will continue to manage all the Government-owned electricity assets in GBAO for the remaining 16 years of the Concession Agreement. Reliability and Quantity of Electricity Supply. Substantial. Prior to the project, daily power supply in GBAO averaged about 3 hours per day, less in winter. With the project, PEC now provides around 24 hours of power supply per day in winter to customers of the main grid,which account for over 70 percent of the total customers (this excludes some remote areas, where the power supply varies from 8 to 16 hours per day. The supply position is better than most areas in the rest of the country covered by Barki Tajik. Hospitals and schools can function properly in winter with available power supply. Annual electricity supply has increased from 135,000 MWh/year in 2002 to 174,000 MWh/year in Rationing, which was the norm without the Project, has been replaced by energy surpluses, which allows PEC to plan the maintenance of units in capital repair without affecting the reliable supply of energy Financial Sustainability. Substantial. PEC s actual financial performance in was below the appraisal forecasts, due to tariff increases that were slower than anticipated by the Concession Agreement, lower -than-projected electricity sales that reduced its operating cash flow, an almost two-fold depreciation of the exchange rate of the the Tajikistan Somoni in relation to the US dollar, and an average annual inflation of over 10% in which led to higher operating costs. PEC s operating income and cash flow became positive in 2009 and have improved since, as has the company's ability to meet its short-term and long-term financial obligations. In 2009, the company s highly liquid assets at hand were more than 14% of the short-term liabilities, improving from 5% in Collection rates have improved from 40 percent to about 100 percent of sales for the year ending December 31, PEC, with the support of the Aga Khan Fund for Economic Development, has prepared a business plan for , based on a new financial model developed by PEC based on its experience of the last several years. Necessary budgets for plant maintenance are allocated annually. However, the market risk of demand being lower than expected did materialize during Project implementation and a Financial Restructuring Plan was put in place to improve PEC's financial performance. While PEC's operational position has improved, its consumers need continued support with tariff subsidies. PEC would also require softer on-lending terms to continue its investment program in the remote areas. Environmental and Social Sustainability. Substantial. A number of policy actions and technical measures have been taken to assess and mitigate the project's environmental and social impact, and to ensure its sustainability. These are discussed in detail in Section 11 below. A community outreach program was conducted to promote the capacity of communities to manage their power

4 resources to support public services and to benefit from community -based enterprises. The joint IDA and IFC involvement was crucial in mobilizing Swiss Government financing to enable the Government of Tajikistan to meet its social protection obligations through a social subsidy plan, since a large segment of residential consumers would be unable to pay even the US 2.12 cents/kwh tariff. In sum, according to the ICR (page 9), Pamir I is a sustainable power plant today. The investments made under the project are expected to have a lifetime of at least years. PEC carries out several activities annually at Pamir I to further improve safety and reliability. Staff have been trained and participate in intensive annual capacity building programs. 5. Efficiency: The project's efficiency is substantial. The economic rate of return (ERR) at the completion stage is 12.2%, which is lower than the appraisal estimate of 19%. This reduction is primarily due to the investment cost over -run caused by the catastrophic flooding accident in 2007 and electricity sales that were lower than projected at appraisal until However, if the non quantified benefits -- such as the elimination of the significant winter and summer black -outs experienced by the customers, the positive environmental impact, the improved quality of life (homes, schools and hospitals and businesses) -- had been taken into account, the ERR would be significantly higher. At project closure, the financial rate of return (FRR) was 8.9%, which was less than the 9.8% estimated at appraisal. Similarly, this is due to the higher actual investment costs, and lower electricity demand, the latter being partly influenced by the global economic recession and its downward pressure on local economic activities. Although there were significant time and cost overruns, these were not due to inefficient resource management. Rather, they arose from the unforeseen event of a catastrophic flooding, which necessitated the restoration of the Pamir 1 plant and Additional Financing. A lesser amount of Additional Financing was actually required compared to the amount originally estimated (see Section 2d). a. If available, enter the Economic Rate of Return (ERR ERR)/Financial Rate of Return (FRR FRR) at appraisal and the re-estimated estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal Yes 19% 85% ICR estimate Yes 12.2% 85% * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The project's development objectives were substantially achieved. Pamir I has, thanks to the project, become an environmentally sustainable power plant, and PEC's financial situation has improved, although performance was still below target at project closure. Quality and reliability of electrical services have been enhanced. With relevance and efficiency both substantial, project outcome is assessed as satisfactory. a. Outcome Rating : Satisfactory 7. Rationale for Risk to Development Outcome Rating: At appraisal, the Bank team correctly assessed the project as a high impact, high risk initiative, taking into account the market, revenue risks, technical, operational, financing, economic risks, and political risks, which were described in detail in the PAD. The market risk of lower-than-expected demand did materialize, and a Financial Restructuring Plan had to be put in place to improve PEC's financial performance (ICR, page 13-14). Although improving, PEC's financial performance was below the targeted level at project closing. This financial risk is mitigated by the Concession Agreement, which would continue to be in force for the next 16 years. Moreover, 70 percent of PEC's equity is held by the Aga Khan Fund for Economic Development and 30 percent by IFC, who would continue to work with PEC. There have also been significant improvements in terms of increased collections and reduced losses. According to the ICR (pages 13-14), the economic and financial analysis indicates that the financial health of the company has turned around to the positive, and with additional export opportunities to Afghanistan being realized, some of the impact of less-than-anticipated demand would be partially offset. The PAD also indicated possible political risks to the project. The actual implementation experience, however, showed the Government s strong

5 political championship and the strategic coherence among the various key ministries concerned. Overall, the risk to development outcome is moderate. a. Risk to Development Outcome Rating : Moderate 8. Assessment of Bank Performance: a. Quality at entry: Preparation and appraisal were carried out jointly by IFC and IDA, with each organization providing specialist staff. Duplication of effort was avoided. While innovative, design was appropriate for meeting the private sector s commercial objectives while, at the same time, providing reliable power supply to the poorest mountainous region, and addressing the social objective of keeping the electricity tariffs as low as possible. IDA's involvement and concessionary financing were critical for the achievement of the latter two goals. A socio-economic survey was conducted as part of the environment and social assessment of the Project and estimated the average annual income for the typical project area family and the willingness to pay for energy. Preparation was in compliance with World Bank Group safeguards policies and guidelines, and appropriate environmental and social impact mitigation measures were included (see Section 11 below). A considerable effort was made to consult with local stakeholders. Seventeen public hearings, engaging a wide range of the GBAO population including townspeople, rural villagers, teachers and hospital workers, were conducted in October, A substantial amount of work was put into preparing the legal framework governing the project. Eight legal agreements were prepared. One of these -- the Concession Agreement between PEC and the Government -- was signed prior to Board presentation of the project. Also by Board presentation, the owners' engineer had been appointed and was in situ, and procurement activities had already begun The only shortcoming during preparation was the assumption (based on information in the project feasibility study ) that most consumers had been supplied with working meters. During implementation, it was discovered that nearly all the existing meters were inoperable, and that, as a consequence, technical losses were over three times higher than had been supposed. Quality-at at-entry Rating : Satisfactory b. Quality of supervision: According to the ICR (pages 14-15), the project was adequately supervised. The team had a comprehensive skills mix, and supervision missions were conducted jointly with IFC. Sufficient budget and staff resources were allocated. Project implementation was greatly facilitated by field -based staff providing procurement and financial management functions. The IDA team helped PEC develop a re-metering program to reduce losses. The IDA and IFC teams responded promptly to the two major crises that arose, the deteriorating financial situation of PEC during by developing the Financial Restructuring Plan; and the unexpected catastrophic flooding in February 2007, which severely damaged the Pamir I Hydropower Plant. The ICR notes that "The Management comment on ISR No. 8, commented on the dedication of the IDA and IFC staff, who worked under extreme conditions (18 hour trip on bad roads, 16 hour workdays, sub-freezing temperatures at 10,000 feet altitude with no space heating, one meal a day, etc ) in March 2007, to help bring much of Pamir capacity back on -line following the catastrophic accident." IDA's Additional Financing helped to ensure that the restoration of Pamir I Hydropower Plant would be permanent instead of a temporary fix, thus also helping to ensure the achievement of the DO. The ICR (page 7) notes that: "Close supervision and ownership by IFC and the Aga Khan Fund for Economic Development contributed to greater accountability of PEC's management and timely implementation. Implementation of the Private-Public Partnership mechanism resulted in greater transparency and better operational performance in the utility." Quality of Supervision Rating : Satisfactory Overall Bank Performance Rating : Satisfactory 9. Assessment of Borrower Performance: a. Government Performance: The Government demonstrated its strong commitment to the project and its objective. The Government participated intensively in the planning and design stages. For example, Ministers and senior civil servants

6 participated regularly in the Working Group for negotiating the Concession Agreement; the Cabinet and Presidential administration considered it in detail before giving Government approval; and Parliament ratified critical sections of the Concession Agreement. The Government also contributed existing electricity assets in GBAO, including all generation, transmission and distribution facilities, to the Concession. The Government also provided rebates in various taxes to PEC. As part of the Financial Restructuring Plan, the Government deferred interest payments until During implementation, the Government continued to support the project and PEC by providing strong political championship and aligning strategy among the key ministries, namely, the Ministry of Finance, Ministry of Energy and Industry, and the Ministry of Economic Development and Trade. This approach helped sustain keen interest through monthly reviews of implementation progress and kept the project on track. Government Performance Rating Satisfactory b. Implementing Agency Performance: The project was implemented by PEC almost in line with the original schedule, until the catastrophic flooding incident in February PEC established dedicated operational teams to provide intensive monitoring and oversight. To implement the Environmental Management Plan, PEC established a Health, Safety and Environment Unit at project headquarters in Khorog. According to the ICR (pages 15-16), "PEC s project management team constantly monitored Project progress, addressed bottlenecks and provided overall guidance to ensure that Project momentum was maintained. It initiated a metering program, improved collections, established a customer service department, improved community relations in the areas it serviced, and procured and installed the necessary equipment, both to rehabilitate the plant and to protect it against future accidents. PEC also initiated social projects to help the communities with other issues such as installation of a clean water pipeline and sponsorship of chess classes in the schools. From PEC financed US$3.78 million of Project costs from its capital expenditure fund (compared to US$0.9 million planned when the Additional IDA Grant was prepared)." Minor shortcomings include the delay in submitting the audit report for the year ending December 31, 2009, and some delays in Interim Financial Reports, which were eventually received. Moreover, not all of the equipment to be financed by the Additional Financing was procured before the Closing Date. Using the Bank procurement guidelines, PEC with its own funds completed all the activities planned under the IDA grant, except for the remaining electrical equipment, resulting in cancellation of part of the grant. PEC intends to finance the remaining electrical equipment, estimated at US$ 440,000, in Implementing Agency Performance Rating : Satisfactory Overall Borrower Performance Rating : Satisfactory 10. M&E Design, Implementation, & Utilization: a. M&E Design: The development and outcome indicators for the project were adequate for assessing progress in meeting the DO monitoring the achievement of intermediate results. Both outcome and intermediate/output indicators were developed for the end of the project. However, the important output indicator for technical losses in the transmission and distribution network reduced to 8 percent should have been accompanied by baseline measurements.. b. M&E Implementation: PEC collected data regularly in line with the performance indicators. Actual measurements were compared with the target values. Results were made available to IDA and PEC s stakeholders (the Government, the Aga Khan Fund for Economic Development and IFC) through the quarterly Financial Management Reports and Interim Financial Reports, PEC's monthly progress reports, and the December annual report. c. M&E Utilization: The reports were utilized by PEC and its stakeholders to plan capital expenditures, design and implement measures to improve collections and reduce losses, and inform the discussions related to PEC's Financial Restructuring Plan.

7 M&E Quality Rating : Substantial 11. Other Issues a. Safeguards: The PAD reports (page 15) that the project was rated Category "B" for environmental assessment purposes because it supported rehabilitation, upgrading and expansion of an existing power generation, transmission and distribution system. By the project's appraisal stage, an Environmental and Social Impact Assessment Study had been completed, which included extensive public consultations, and a detailed Environmental Monitoring and Management Plan (EMMP) had been prepared. According to the ICR (page 6), PEC "took all necessary measures to implement the EMMP in a timely manner. IDA fielded several environmental safeguard missions to review PEC s compliance with the EMMP, including two comprehensive safeguard reviews in September 2009 and September 2010, which concluded that "the EMPP continued to be implemented satisfactorily, with no major deviations observed during the site visits." In addition to OP 4.01 (Environmental Assessment), the PAD states that three further safeguard policies may be triggered -- Natural Habitats (OP 4.04), Involuntary Resettlement, (OP 4.12), and Safety of Dams (OP 4.37). With regard to the last of these, the PAD reports the opinion of dam safety experts consulted by the project team that the rubble and boulder dam on the Gunt River is stable, but that monitoring of the dam would nonetheless be included in the project's safeguards monitoring arrangements. Involuntary resettlement was also included in these arrangements to take account of the possibility of the adverse effects of depleted water resources on the livelihood of livestock farmers living in and around the Gunt River Valley. With regard to natural habitats, monitoring was to ensure that the seasonal draw-down of water required by the Pamir plant did not have an adverse impact on the fisheries in, and flood plain surrounding, Lake Yashilkul. According to the ICR (page 6), "all applicable World Bank Group safeguards policies and guidelines were considered and addressed during the environmental and social assessment of the project." The initial project design was adjusted so as to be in compliance with World Bank Group safeguard policies and guidelines and appropriate environmental and social impact mitigation measures were included. The ICR further reports (page 6) that all applicable safeguards policies during the project's construction and operational phases were addressed in the EMMP, which, as noted above, was satisfactorily implemented. b. Fiduciary Compliance: PEC's financial management (FM) arrangements, including accounting and reporting, internal control procedures, planning and budgeting, external audits, funds flow, organization and staffing, were acceptable to the Bank. (ICR, page 8) During the FM ratings were consistently rated Highly Satisfactory. During this period, auditors acceptable to the Bank carried out both the entity and project audits, and reports were submitted in a timely manner. However, effective March 3, 2007, changes in the national legislation for audit services required the auditors to have local registration and local staff. PEC was unable to extend its contract with its auditors and had to recruit new auditors, which caused delays in the receipt of the audit reports for the year ending December 31, Consequently, FM ratings were downgraded to Moderately Satisfactory in and remained such at project closing due to delays in submitting FM and audit reports. These were eventually received and found to be acceptable to the Bank. c. Unintended Impacts (positive or negative): d. Other: 12. Ratings: ICR IEG Review Outcome: Satisfactory Satisfactory Risk to Development Moderate Moderate Reason for Disagreement /Comments

8 Outcome: Bank Performance : Satisfactory Borrower Performance : Satisfactory Quality of ICR : Satisfactory Satisfactory Exemplary NOTES: - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. 13. Lessons: The ICR offers the following lessons: (1) High quality project management is an important pre -requisite for success, particularly in difficult implementation environments with limited resources available. (2) Good community relations are important and critical for the success of a public service entity, and should include personal visits to the communities and listening to the consumers' concerns. (3) A Public-Private Partnership can work, even in the poorest regions, by introducing improved governance, and provided there is adequate commitment of Government, the private company, the Sponsor, and the International Financial Institution(s). (4) A high-risk project, with significant development impact is worth doing, but it will require significantly more resources, commitment from all parties, and a good project design and a motivated implementing agency. IEG notes the following lesson: (5) The assumption that demand will meet or exceed estimates because supply at the outset of the project is in extreme shortage, may be undermined by other causal factors, especially the overall economic climate. Even in conditions of acute under-supply, the risk posed by economic factors should be taken into account. 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: The ICR is clear, well-written and solidly based on quantitative evidence. It is one of the few that assesses the relevance of objectives vis-a-vis current Bank and country objectives and sector strategies (most cite the original PAD objectives at appraisal). The details on implementation aspects, particularly regarding the catastrophic flooding, were especially useful. The assessment of outcomes goes beyond just the individual indicators and assesses the results of the project vis-a-vis the PDO. The lessons learned are well selected and well -rooted in the implementation experience of the project. The financial and economic analysis at completion was detailed and adequate. a.quality of ICR Rating : Exemplary

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