THE WORLD BANK GROUP AWorI Froo of Povorty 3. Implementing Agency MINISTRY OF ENERGY & MINERAL RESOURCES Address

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized THE WORLD BANK GROUP AWorI Froo of Povorty 3 IbcWorSdhnk 6671 Rev. Updated Project Information Document () April 15, 2003 Project Name JORDAN-SAMRA POWER PROJECT Region Middle East and North Africa Region Sector Power (100%) Project ID P Supplemental Project Borrower(s) TBD (PROJECT COMPANY) Implementing Agency MINISTRY OF ENERGY & MINERAL RESOURCES Address Address P 0 Box , Amman, Jordan Contact Person Eng Azmi Khreisat, Secretary General Tel Fax generals@memr gov jo Environment Category A Date Prepared April 15, 2003 Auth Appr/Negs Date March 1, 2004 Bank Approval Date May 1, Country and Sector Background Background Jordan is almost entirely dependent on imported oil to meet its energy needs. Without the oil grant from Iraq, Jordan's annual oil import bill would be about US$ 700 million, about 30 percent of Jordan's merchandise export revenues. The oil grant from Iraq is US$300 - US$400 million per year at prevailing international crude oil prices, a significant reprieve for Jordan's balance of payments. The rest of oil imported from Iraq is priced at prevailing international prices, and paid for by exports of goods and services from Jordan to Iraq under the United Nations Oil for Food Program. On the whole, the energy sector of Jordan has performed relatively efficiently, although subsidies for investments and on prices still prevail. As the economy of Jordan evolves to become more service-oriented, the Government has recognized that an efficient energy sector is vital to the continuous growth of the economy, and its competitiveness. The Government's policy aims at meeting the energy needs of the country in an economically and environmentally sustainable manner and to improve the security of supply through: (i) reform of the energy sector in order to improve its efficiency, and to attract private investments for its development; (ii) improving energy use efficiency; (iii) economic diversification of fuel types and supply sources by increasing the role of natural gas in the energy balance through imports from Egypt: (iv) increased exploration activities to develop domestic gas reserves, and (v) increased use of

2 2 renewable energy (mainly wind and solar) to reduce the dependence on imported oil and potential adverse impacts on the balance of payments and integrating climate change aspects. Implementation of the Government's energy sector reform agenda started in 1995 under the Economic Reconstruction Development Program. Significant progress has been achieved, especially in the electric power sub-sector, because of the strong commitment of Government to the reforms. Jordan is a leader in energy sector reform in the region and accomplishments include: * The adoption of electricity legislation that clearly defines the long-term vision of the Government of establishing a competitive, largely privately owned electricity system and separation of policy, regulatory and operational functions. * The establishment of the Independent Electricity Regulatory Commission (ERC). * The unbundling of the National Electric Power Company (NEPCO) into legally and functionally independent commercial companies, comprising one generation company (the Central Electricity Generating Company - CEGCO), a transmission and load dispatching company as the successor of NEPCO, and two distribution companies - the Electricity Distribution Company (EDCO) and the Irbid Electricity Distribution Company (IDECO). The Jordanian Electric Power Co. Ltd (JEPCO), which is responsible for electricity distribution in the greater Amman area, accounts for about 60 percent of the electricity distribution market and has been under a long-term private concession since the early 1960s. * An Egyptian parastatal company has been selected by the Government for the construction of the Jordanian Gas Transmission Pipeline Project for the supply of Egyptian gas to Jordan, primarily for power generation and industrial uses. It is expected to be completed by end The construction of the Egyptian side of the pipeline across the Sinai is in progress, and the first gas to the Aqaba Power Station is expected to be delivered in June * A consortium of financial and transactions advisers has been appointed by the Government to develop the power sector privatization strategy, and to assist with the privatization of CEGCO and the remaining distribution companies (IDECO and EDCO). Depending on market conditions and the developments in the geopolitical situation, the transactions are expected to be brought to the market later in 2003 or in * Steps have also been initiated for the privatization of Petra Drilling and National Petroleum Company PLC. Main Sector Issues In the short-term, apart from the impact of the possible discontinuation of the Iraq oil grant, the main issues relate to: (i) emerging potential shortages in electricity supply possibly starting in the summer of 2004; (ii) the fragile financial performance of the power companies in part due to distorted electricity tariffs levels, which could affect the privatization of the power companies and the capacity to attract private investments; (iii) the urgent need to build capability and capacity within the Electricity Regulatory Commission (ERC) to enable it to carry out its

3 3 functions effectively; and (iv) ensuring that the arrangements for the upcoming privatization of the power companies are consistent with the Government's long term objectives for the sector. Emerging Potential Power Shortages Electricity demand is projected to grow at a rate of 5 to 6 percent per year, which in view of higher growth rates in the past and expected economic performance could materialize. Under this scenario and the growing capacity constraint, Jordan may experience for the first time possible shortages in electricity supply during the summer of 2004 and 2005, even with the expected capacity additions through the re-powering of the Rehab Power Station into a combined-cycle operation, and the planned construction of a 150MW new combined-cycle plant at the King Hussein Power Station site. Steps have been initiated to begin construction of these power stations as soon as possible, to ensure that the projected shortages will not become larger, in case the proposed Samra Power Project is delayed beyond the current projected commissioning date of year Even at a lower growth rate of demand of about 4 percent per year, the need for additional generating capacity remains valid. Overall efficiency is relatively high, with plant availability close to 90 percent and transmission and distribution losses at about 12.5 percent. To alleviate the shortages expected in 2004/2005, NEPCO has initiated a program to purchase electricity from industrial and hotel auto-producers. Load management arrangements and demand side management are being initiated. In addition, NEPCO has entered into agreement with Egypt for firm purchases of electricity from Egypt during the peak summer months of those years. Electricity Tariffs and Sector Financial Performance Electricity tariffs are uniform throughout the country in spite of the differences in the cost of supply in the various area distribution markets. The electricity tariff structure is reflective of the structure of economic cost of supply for large and medium size industry. For all others, the structure is a flat single energy charge that does not distinguish between differences of cost of supply by time-of-day. There is a step-wise increasing block rate structure for households, including a non-targetted life-line consumption block of 1-16OkWh per month priced at $0.043/kWh. About 50 percent of total household electricity consumption is within the lifeline block. The average tariff for households is $0.06/kWh, and about 80 percent of economic cost. Tariffs for agriculture and street lighting are the lowest, about 47 percent and 20 percent respectively of economic cost. Tariffs to commercial and hotel enterprises, and government supported social agencies are high, about 120 percent of economic cost, mainly to cross-subsidize other consumers. However, the average sector-wide tariff (revenue/kwh sold) of about $0.065/kWh is about 75 percent of economic cost In December 2002, the existing tariff structure was slightly improved with a modest increase of 4 percent for all category of consumers except industry, hotels and commercial enterprises. The financial performance of the power companies remains fragile, especially the IDECO and EDCO distribution companies, which operate in predominantly rural areas, in-spite of the subsidies on heavy fuel oil and diesel fuel for power generation. CEGCO, the generation company earns about 6 percent return on capital, and NEPCO, the transmission company about 3 percent return on capital employed. Cash transfers are provided by CEGCO and NEPCO to IDECO to meet mandated return of 10 percent to the private investors who hold 40 percent of its

4 4 shares, and to EDCO to meet its operating expenses. JEPCO on the other hand, because of its more affluent urban customer base with a higher average tariff, and operationally more efficient is able to meet the rate of return requirement of 7-16 percent on capital under its concession agreement. Tariff adjustments would be required to enable NEPCO to meet obligations under the future PPA under the proposed project, and to enhance attractiveness of the companies to be privatized. The impact of the restructuring and planned privatization on the retail tariffs is under discussion in the technical working groups, with the help of the privatization advisors. The Government is expected to make a final determination on the retail tariff policy over the next few months. Regulation The new Electricity Law of 2001 has improved provisions to ensure the independence of the ERC and core staff have now been appointed. Secondary legislation is being prepared, a substantive technical assistance package has been obtained from the EU for capacity building, and consultants are being recruited. On the tariff side, a cost of service analysis has been carried out in collaboration with the Bank and the financial implications of various tariff adjustment scenarios are being worked out. In addition, further financial analysis, including effects of capital restructuring of the companies, is being carried out by the privatization advisers, which would have implications of tariffs to meet viability criteria. A number of key policy directives are awaited from the Government. These include uniform tariffs country-wide in-spite of cost disparities; targeted life-line rate; elimination of inter-company transfers; criteria for viability of NEPCO, which would remain state-owned; timeframe for transition to new tariffs. With regard to the industry structure, the principles of a transition over time to a more competitive electricity market is embedded in new law. However, the detailed technical and commercial transition arrangements are still under discussion and further technical work is needed. Privatization Consultants to the Executive Privatization Commission are currently preparing the privatization of CEGCO, IDECO, and EDCO and various working papers dealing with technical issues are being discussed in a technical working group. The Government remains committed to the privatization program, but external market conditions may cause delays in bringing these transactions to the market. The Bank is directly involved in the technical work through the administration of a USAID-financed trust fund. Government Strategy The strategic direction for power sector reform has been clearly articulated and the adoption of the revised Electricity Law in 2001 has provided a sound legal basis. Implementation of the reforms is well underway, although the completion of the planned privatization transactions are likely to be delayed beyond 2003, mainly because of market conditions. The Government has recognized that there is a need for a more comprehensive energy sector strategy, covering oil and gas and renewable energy, and the Bank will be providing further assistance as part of the agreed Country Assistance Strategy.

5 5 In the medium-term, the main issues arise from the significant introduction of natural gas use in the energy balance to displace heavy fuel oil produced by the local refinery, for which there will be no alternative market within Jordan and could not be exported competitively either. This impacts the viability of the existing Zarqa oil refinery, whose concession expires in 2008, and it has implications for the liberalization of the downstream petroleum market. The situation is further complicated by on-going arrangements by the Government for a private sector venture for the construction of an oil pipeline from Iraq to supply crude oil to the Zarqa refinery. A second challenge is how Jordan could continue to attract private investments in a significant way to maximize economic benefits. Another challenge in the medium to long-run is to design a coherent strategy to guide the future development of the sector. Such a strategy, should build on the progress made so far in the sector, take into account the significant emerging role of natural gas, the potential for regional trade in electricity and natural gas, as well as the macroeconomic context to achieve the long-term vision of the Government for effective contribution of the energy sector to economic growth, and well-being of the population. 2. Objectives The main objective of the Project is to meet the electricity needs of the country in an economically and environmentally sustainable manner to contribute to economic growth, and well-being of the population of Jordan. As one of the largest foreign direct investments in Jordan, it should help pave the way for attracting additional private capital investment flows for infrastructure development in Jordan. The Project is part of the medium to long-term least-cost power generation expansion plan in Jordan. It would help avoid power shortages and secure significant economic benefits for the country. By enabling the Government to shift costs to the private sector, and reducing the need for public investment, this Project would help make available scarce public resources to increase Government support for the social sectors of the economy. The Project is consistent with the Bank Group's strategy in the sector, the mainstay of which is to promote efficient development of the sector through institution of fundamental reforms, and active private sector involvement. In line with its economic reconstruction and development program begun in 1995, in which the private sector was expected to play a significant role, the Government committed to and actively embarked on reforming the energy sector, especially electric power. Significant and commendable achievements have so far been made in all aspects. These cover the creation of a competitive electricity market structure; active program to divest power generation and distribution assets by end-2003 to the private sector; new power generation development by the private sector, and establishment of an independent regulatory agency, all founded on a sound enabling legal framework that clearly articulates the Government's long-term sector policy objectives, as well as the roles of the Government, and other stakeholders in the sector.

6 6 3. Rationale for Bank's Involvement Jordan has only limited access to the international loan and capital markets because of its sovereign credit rating (Ba3/BB-). It is therefore, mainly dependent on finance from multilateral and bilateral sources for financing infrastructure development. Over a period of several years, the Bank has actively assisted the Government in formulating its policies to oversee and promote private power development in a transparent and competitive manner. The Government requested the Bank to consider an IBRD Guarantee to help bidders mobilize commercial finance in support of the Project. The benefit perceived by the Government of an IBRD Guarantee is that it allows for allocation of only noncommercial risks to the Government, and commercial risks to the sponsors. Unlike an IBRD loan, the IBRD Guarantee would not create any additional liabilities for the Government other than those already contracted under the Project agreements. 4. Description A 450-MW gas-fired combined-cycle power station to be located at Samra Jordan 5. Financing Total ( US$m) BORROWER $ IBRD IDA IBRD GUARANTEE $75.00 INTERNATIONAL FINANCE CORPORATION $ EXPORT CREDIT (UNIDENTIFIED) $ Total Project Cost $ Implementation The Government, through the Ministry of Energy & Mineral Resources (MEMR), has engaged qualified advisers to assist with the procurement of new Sponsors. See description above of procurement process. The successful Sponsors will implement the Project. NEPCO will purchase the Project's output for resale to electric distribution companies (JEPCO, IDECO, and EDCO) and large industrial consumers. The Government, through MEMR and the Ministry of Finance, will provide assurances and guarantees respectively to the Project. The Ministry of Finance will counter-guarantee IBRD. 7. Sustainability The sustainability of the Project will be underpinned through a combination of the following factors: (i) economic benefits to the Government from an IPP with a competitive tariff and which would help to address growth needs for power in the country; and (ii) private sector operation backed by firm financing commitments and commercial and financial benefits to the Sponsor.

7 7 8. Lessons learned from past operations in the country/sector Learning from the experience with IPPs in other countries, certain safeguards have been incorporated in the Project design with respect to mitigating sectoral and macroeconomic risks. The entry of the first IPP takes place when the reforms have a sound legal base in the new electricity legislation. A regulatory agency has been created, the basic new industry structure is in place (unbundling completed), and transition arrangements have been clarified in the new law. While the financial position of the power sector remains fragile, the financial (and economic) benefits of the oil to gas conversion strategy are clear. The gas supply contract with Egypt includes appropriate floor and ceiling prices, which will protect the country and the power sector against the impact of volatile fuel prices. The ERC has prepared a sectoral financial model which enables it, inter alia, to analyze the impact of the proposed Project on the retail tariffs. The Government has engaged experienced advisors to ensure that the privatization transactions are properly prepared before being brought to the market. The transitional arrangements and timeframe for moving from the single buyer model to a competitive wholesale market are still being worked on, but given the fast growing demand, limited reserve capacity, the size of the electricity market, the existing level of cross subsidies and limited regional interconnection facilities, there are clear limitations to the extend that competition within the market can be introduced in the short run. Incorporating lessons from other countries, at this stage it seems likely that a cost based pool market model will be introduced, while gradually allowing the distribution companies and large customers to purchase power directly from generators. These are all demonstrations that not only the Government has followed a rather cautious approach in implementing its power sector reform, but also that proper attention is being given to lessons learned in other countries where IPP were introduced. 9. Environment Aspects (including any public consultation) Issues : The legal base for environmental assessment in Jordan is provided by Law #12 on environmental protection and its revision of The revised law refers to mandatory EIA for environmentally significant projects; however, there is no decree or ordinance yet setting forth guidelines for environmental assessments. The expected environmental issues that the project (power plant) will entail are mostly related to air pollution due to atmospheric emissions as well as nuisances associated with the construction of the project. Workers and population safety issues should also be of concern. For the purpose of this project, the standards to be followed will be those prescribed in the Bank's Pollution Prevention and Abatement Handbook or those applicable under Jordanian regulations, in case such standards are stricter. The land for the project site is owned and will continue to be owned by The Government. The Government acquired the site in 1999 after paying compensation to land owners as required by Jordanian law. A rapid Social Assessment (SA) was conducted in June 1999 to investigate the acquisition by eminent domain of 17 ha of privately-owned land in Zarqa governorate in order to

8 8 accommodate the construction of the proposed power plant. The SA took place after the land acquisition had been officially approved but before the compensation levels were announced or negotiated with the owners. It found that the land being acquired was uninhabited and "dead"; that the acquisition was being done in according to laid-down procedures; that it occurred no physical displacement of persons nor displacement of economic activities; nor would any cultural or social issues arise other than the matter of level of monetary compensation finally negotiated with the land-owners. It was recommended that this process should not be interrupted. A consultation process with key stakeholders, including landowners, will be conducted to support the preparation of the EIA. This will include meetings with Jordanian NGOs, including the Jordan Environment Society, The Royal Society for Conservation of nature and Friends of Archeology. On-site meetings would be conducted with local residents and potentially affected parties. For additional information on this aspect please refer to the project's integrated safeguards data sheet. 10. List of factual technical documents: 11. Contact Point: Task Manager Tjaarda P. Storm Van Leeuwen The World Bank 1818 H Street, NW Washington D.C Telephone (202) Fax: (202) tstormvanleeuwengworldbank.org 12 For information on other project related documents contact The InfoShop The World Bank 1818 H Street, NW Washington, D C Telephone (202) Fax. (202) Web http 11 www worldbank org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Tables, Charts, Graphs: Processed by the InfoShop week ending 09/20/2000

9 9 For a list of World Bank news releases on projects and reports, click here SEARC FL _ ]ACK SE MAP I SHOWCASE.