Nepal: Power Sector Reform and Sustainable Hydropower Development (IDA Credit 5728-NP) Implementation Support Review (September 12-15, 2017)

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Nepal: Power Sector Reform and Sustainable Hydropower Development (IDA Credit 5728-NP) Implementation Support Review (September 12-15, 2017) Aide Memoire 1. During September 12 to 15, 2017, a Bank Team 1 carried out an Implementation Support Review of the Power Sector Reform and Sustainable Hydropower Development Project. This Aide Memoire (AM) summarizes the findings on the status of the project implementation, recommendations and agreements reached with the relevant agencies to take corrective measures and/or to expedite implementation. The AM was discussed at the wrap-up meeting on September 20, 2017 with Dr. Baikuntha Aryal, Joint Secretary of Ministry of Finance (MoF), as the Chair. As agreed during the meeting, this AM will be classified as a public document under the World Bank's Access to Information Policy. 2. During the wrap-up, the Bank team informed about the change in the task management of the above noted Project from Dr. Rabin Shrestha (Sr. Energy Specialist) to Dr. Xiaoping Wang (Sr. Energy Specialist) who will be operating from Kathmandu Office. OVERALL STATUS AND KEY PROJECT DATA 3. The project development objectives (PDOs) are to: (a) strengthen the capacity of the power sector agencies to plan and prepare hydropower and transmission line projects following international standards and best practices; and (b) improve the readiness of the power sector agencies for regulatory and institutional reforms. The progress towards achievement of PDOs is slower than planned; however, the PDO is still relevant to the country s context and are achievable by the project closing date. This Project is particularly very important as this includes a number of underpinning activities that will support the power sector reform that the Government of Nepal (GoN) has undertaken. The progress towards achievement of PDOs continues to be Moderately Satisfactory given the likelihood of meeting the PDO by the closing date. Table 1: Key Project Data Project Data Summary Ratings Previous Current Board Approval: September 25, 2015 Progress towards achievement of PDO MS MS Effectiveness Date: June 2, 2016 Overall Implementation Progress MS MU Closing Date: June 30, 2020 Component 1 S MS Credit Amount: Component 2 S MS IDA $20.0 m Amount Disbursed (as of October 31, 2017): USD 0.3 Million (1.5% of commitment) Component 3 S MS Procurement MS MS Financial Management MS MU Safeguards S MU 4. The overall project implementation gained some momentum after delay for over seven months. The status of implementation of various activities under each component are described below. 1 Rabin Shrestha (Task Team Leader and Sr. Energy Specialist), Xiaoping Wang (Sr. Energy Specialist), Caroline Mary Sage (Senior Social Development Specialist), Drona Ghimire (Sr. Environmental Specialist), Shambhu Prasad Uprety (Sr. Procurement Specialist), Timila Shrestha (Financial Management Specialist), Rekha Shreesh (Social Development specialist), Barsha Pandey (Operations Analyst) and Tara Shrestha (Program Assistant) 1

2 Component A: Preparation of Hydropower and Transmission Line Investment Projects 5. Preparation of Upper Arun Hydroelectric Project (UAHEP) and Ikhuwa Khola Hydropower Project (IKHP): The procurement of the two consulting service assignments is under process for this activity. Nepal Electricity Authority () has completed the technical evaluation for the detail engineering design of Upper Arun Hydroelectric Project and submitted it for Bank s review on September 25, The second assignment is for the assessment of environmental and social impacts and preparation of mitigation plans. has completed the shortlisting of firms and has submitted the draft Request for Proposal (RFP) and shortlist report to the Bank for review on September 26, Additionally, the Bank team has provided comments on the Terms of Reference (ToRs) for Panel of Expert (PoE) for Dam safety and for the Environmental and Social (E&S) and the cost estimates for the PoE for Dam Safety. The team is finalizing both ToRs and agreed to submit the final version to the Bank by October 18, This was received in November and the Bank has already provided no objection to it. 6. A separate fishery study is under implementation. The consulting firm has been hired by the Environment and Social Studies Department (ESSD) of and the field work started from first week of November This study is conducted to collect the baseline data of the Fishery. 7. Identification of Priority Transmission Line Projects: The scope of this activity is to carry out detailed feasibility study of one or two transmission lines. It was agreed that would prepare a brief concept note on the rationale and scope of at least two transmission lines, focusing on those that would enabling power evacuation from large hydro plants and cross-border power exchanges. The concept note will also include related load flow analysis. The Project team agreed to submit the concept note for Bank consideration by October 23, This was received on November 27 which is currently under review. Given the delays in implementation, this component has been downgraded to Moderately Satisfactory. Component B: Studies and Preparation for Policy Recommendations and Sector Reform 8. River Basin Planning Study: The Water and Energy Commission Secretariat (WECS) team is evaluating the technical proposals of the shortlisted firms and are contacting the firms for clarifications before finalizing the technical evaluation. It was agreed that the evaluation report will be submitted for Bank s review by October 30, This was received on November 4, 2017 and the Bank has provided its no objection. The South Asia Water Initiative (SAWI) Phase II Trust Fund (TF) supporting this study is extended by one year to June 30, 2018, in line with the closing date of the parent TF. The fund size is reduced from USD2.5 million to USD0.5 million, considering the use of funds by the revised TF closing date. As the study is expected to take 36 months, the MoF has agreed to provide stopgap funding after the closing of the SAWI TF. It was agreed that WECS will prepare a list of hardware and software needed for supporting the river basin planning study, including, but not limited to, vehicles (purchase and/or rental), office equipment, telecommunications, computer software, etc., and shall submit it for Bank review by November 15, These items would be funded by SAWI TF. 9. Water resource management and regulations: The Bank had hired consultants to help draft the Water Resource Act and Policy for WECS. The drafts of the Act and Policy are ready for stakeholder consultations after which this will be submitted to the Cabinet for approval. The tentative timeline for submission to the cabinet is end of November Power System Expansion Plan, including updating the Generation Master Plan: For this activity, an international expert is being hired to review the existing planning approach and the software used by the Systems Planning Department of the. The expert will recommend suitable generation planning software, thereafter. Based on the recommendation, necessary generation planning software would be procured and generation master plan would be prepared. The Bank and has agreed on the ToR of the international consultant, and the Bank will start the hiring process using the Bankexecuted Public Private Infrastructure Advisory Fund (PPIAF) TF. 2

3 11. business restructuring for improved management and efficiency: Under this component, plans to improve the revenue management system (metering, billing and collection system), carry out asset valuation, and introduce smart metering systems in some selected distribution units. will identify the need and scope of a new revenue management system based on the ongoing pilot of online payment systems in Kathmandu and Pokhara. recognizes the importance and urgency of asset valuation for business restructuring and will start to prepare the ToRs for asset valuation with Bank support as needed. It was agreed that the procurement of smart meters could be started immediately including the preparation of the draft bidding document and the cost estimate for the procurement of approximately one million units of smart meters. Such procurement package can be co-funded with IDA funds under this project and the Grid Solar and Energy Efficiency project, depending on the final cost estimates. will submit the draft ToR for asset valuation and draft RFP/cost estimates for smart meters for the Bank s review by October 25, This was received in mid-november which is currently under the Bank s review. 12. Establishment and operationalization of a power trading company: recently created a National Power Trading Company (NPTC) with majority share (51%) owned by. The Managing Director (MD) of the company has been recently appointed. However, the company is not fully functional yet and needs support on operationalizing the company. It was agreed with the NPTC s managing director to hire an individual consultant to help the NPTC with preparation of the business plan for the company. Given delays in implementation, this component has been downgraded to Moderately Satisfactory. Component C: Capacity Building for Safeguard Management and Hydropower Development 13. Strategic Environmental and Social Assessment (SESA). SESA is a part of the Integrated Water Resources Management (IWRM) consultancy package which is under procurement process. WECS is evaluating the technical proposals as highlighted in para 7 above. 14. Guidelines for hydropower environmental and social impact assessment are under preparation as part of separate IFC-supported advisory services to the Ministry of Population and Environment (MoPE). The draft guidelines are already prepared which is now being consulted with stakeholders seeking their feedback/comments. 15. Management of transmission Right-of-Way (RoW) issues: It was agreed in the previous review that the firm will be hired for this study using the funding from the Public-Private Infrastructure Assistance Facility (PPIAF). The Bank has already started the hiring process, and the proposals submitted by the prospective firms are under evaluation. Given the delays in implementation, this component has also been downgraded to Moderately Satisfactory. 16. Given serious delays in implementation of all three components and significantly low disbursements, the overall implementation progress has been downgraded to Moderately Unsatisfactory. KEY POINTS DISCUSSED AND AGREED ACTIONS 17. Need for one project management unit (PMU) to manage Projects within : The Bank team highlighted the need for a dedicated PMU for managing activities under various departments of for this Project. This issue has delayed initiation of other activities under the Project such as detailed feasibility study of transmission line, procurement of smart meters and delay in making advance payment to the consulting firm for the fishery study. The Bank team highlighted the need for prompt action from management to solve this issue and aim to achieve the Project s objective within the Project period. 18. Audited financial statements of : The Bank received the audited financial report of on November 16, However, this report was submitted after 10 months of the due date. 3

4 Submission of the audited financial statements by six months from the FY end is a legal covenant of the Project; but there is substantial delay every year with little efforts for improving the submission time. It is important to ensure the timely delivery of future audited reports and compliance with the legal covenant of the project. FIDUCIARY COMPLIANCE 19. Procurement Performance: A comprehensive procurement plan for the first 18 months was prepared and cleared by the Bank for the activities in October Major procurement volume under this project consists of consulting assignments for preparing detailed engineering design of Upper Arun Hydorpower Project (UAHEP) and Ikhuwa Khola Hydropower Project (IKHP) projects, environmental and social impact assessment, river basin and hydropower master plans, and a generation master plan. Out of these, hiring of consultants for two largest assignments detailed design of the hydropower projects under and river basin planning under WECS has already proceeded to the technical evaluation phase. has migrated to Systematic Tracking of Exchanges in Procurement (STEP) for procurement management and agreed to update the procurement plan by October 31, 2017, which has now been completed. WECS is yet to migrate to STEP and agreed to upload the procurement plan to STEP by October 31, 2017, which has also been completed. Based on the assessment, the overall procurement management performance of the Project continues to be Moderately Satisfactory. 20. Financial Management (FM) Performance: The Finance Officer has been assigned for the Project. However, as the Finance Officer is responsible for the entire Upper Arun Project, the team highlighted the need for a dedicated Finance Officer for the Project with the increase in transaction volume in order to ensure effective project FM as agreed during project appraisal. The Project team was reminded about the overdue unaudited accounts for FY2016/17 which was due on October 15, 2017 and also reminded to submit the audit report by January 15, It was also agreed with WECS to assign Finance Officer for the Project by December 31, The budget of NPR 9, million for for the current FY 2017/18 has been considered adequate for the Project. As agreed, the team was informed that change of funding source has been obtained for the budget from Government to IDA source. In case of WECS, one budget head has been provided in the Red Book for both this Project and Irrigation and Water Resources Management Project (IWRMP) being the same activity under River Basin and Hydroelectricity Development Plan. However, as the budget source has been provided only as IDA Grant (i.e. IWRMP source) while the funding source for WECS under the Project is from the SAWI TF, it has been agreed with WECS to obtain approval from MoF for required amount under TF source by December 31, Disbursements Status: The team noted that no expenditures have yet been incurred for the Project. The DA advance of USD 0.3 million for is yet to be utilized while WECS is yet to open DA. As expenditures are expected to start incurring soon, it has been agreed with WECS to open Designated Account and submit Authorized Signatory Letter by December 31, Entity Financial Management. The external audit report of Entity Financial Statements for FY 2015/16 was received with substantial delay (10 months overdue). The team urged management for timely audit as it impacts disbursement of all projects financed by the Bank. The imperativeness of addressing the recurring audit qualifications on Entity Financial Statements (related to accounting, financial reporting, asset management, internal controls etc.) was again highlighted to management. The team was informed that Expression of Interest for hiring expertise to support on implementation of Nepal Financial Reporting Standards is being issued shortly. The team was also informed that the Asset Management Software has been implemented in all regular cost centres. The team urged management to also address other audit qualifications as included in the Financial Management Improvement Action Plan, the progress of which has now been agreed to be monitored regularly by MOF, MOE and the Bank. The team also reminded that the 4

5 unaudited financial statement of for FY2016/17 is now overdue, and the audited accounts will be due on January 15, Despite lack of progress on the entity level financial management, and delay in placement of dedicated finance staff at the project level, the FM performance rating for the Project is retained as Moderately Unsatisfactory. SAFEGUARD MANAGEMENT 25. Environmental and Social Safeguards: Recently, Environmental and Social Services Department (ESSD) has hired local consulting firm for the fish and aquatic bio-diversity study. However, consulting firm has not mobilized the team yet. ESSD and Project PMU are discussing ways to expedite the fish and aquatic study including providing mobilization advance. Consulting firm for the Environment and Social Impact Assessment (ESIA) under component A has been short-listed. The Project has recently shared draft Request for Proposal for the ESIA with the Bank. There has been delay in strategic environmental and social assessment (SESA), which is one of the activities under the consulting package managed by the WECS. The Project informed that the draft ToR for the Environmental and Social Panel of Experts (PoE) is ready. Guidelines for hydropower s environmental and social impact assessment supported by IFC is under stakeholder consultation process. Consulting firm hiring process has been initiated for Management of Transmission Line Right-of-Way (RoW) study. Overall, the team noted delay, though some works began, in implementation of the environmental and social safeguard actions agreed during the previous review. Hence, the environmental and social safeguard performance is rated as Moderately Unsatisfactory. 26. NEXT REVIEW: The next implementation support review is planned for March Table 2: Summary of Agreed Actions Actions Responsibility Agreed timeline Status as of December 5, Submit Revised ToR and Cost estimate for October 18, 2017 Completed Panel of Expert to the Bank 2. Carryout load flow study for the October 23, 2017 Completed transmission line and share the concept note with the Bank 3. Submit technical evaluation report-river WECS October 30, 2017 Completed Basin Planning 4. Submit draft bidding documents to procure October 25, 2017 Completed smart meters 5. Submit audited financial statements of Entity for FY 2015/16 October 31, 2017 Completed 5

6 Annex 1 Ministry of Finance Dr. Baikuntha Aryal, Joint Secretary, IECCD Mr. Ram Prasad Mainali, Under Secretary Ministry of Energy Mr. Dinesh Kumar Ghimire, Joint Secretary Mr. Sagar Goutam, Sr. Divisional Engineer List of persons met Water and Energy Secretariat Commission Mr. Yagya Prasad Bhattrai, Acting Secretary Mr. Madhav Belbase, Joint Secretary Mr. Maheshwor Lal Shrestha, Sr. Divisional Engineer Nepal Electricity Authority Mr. Kulman Ghising, Managing Director Mr. Jagdishwor Man Singh, Deputy Managing Director Mr. Prabal Adhikari, Managing Director, National Power Trading Company Mr. Bishwa Dhoj Adhikari, Project Director, Upper Arun Hydroelectric Project Mr. Gagan Manandhar, Manager, Transmission Directorate Mr. Ram Chandra Poudel, Manager, Upper Arun Hydroelectric Project Mr. Surendra Chaudhary, E&S, Upper Arun Hydroelectric Project Mr. Manoj Shah, Manager, Distribution and Consumer Services Directorate Mr. Shaligram Acharya, Manager, System Planning Department Mr. Lunar Shrestha, Deputy Manager, Power Trading Department 6

7 Annex 2 PDO Level Results Indicators Capacity of hydro power project prepared Length of transmission line projects prepared. Number of key sector policy and reform proposals validated and endorsed at the institutional level by the MOE,, MOEST, and WECS INTERMEDIATE RESULTS Core Unit of Measure Baseline Updated Results Framework Cumulative Target Values* YR 1 YR 2 YR3 YR 4 YR 5 Frequency MW km Number (2)* Intermediate Result (Component A):Preparation of Hydropower and Transmission Line Investment Projects Detailed engineering and ESIA reports for the UAHEP none Completed Completed Detailed engineering and ESIA none Completed Completed reports for the IKHP Detailed engineering and ESIA none Completed Completed Completed reports for one selected highvoltage transmission line project Intermediate Result (Component B): Studies and Preparation for Policy Recommendations and Sector Reform Action plan for business none -- Completed Completed Completed Completed restructuring Generation master plan none Completed Completed Completed Data Source/ Methodology Number of river basin plans Number WECS prepared with IWRM approach Intermediate Result (Component C): Capacity Building for Safeguard Management and Hydropower Development Number of workshops on SESA/CIA) conducted Number WECS Responsibility for Data Collection, WECS Description (indicator definition) 7

8 Number of workshops on Number WECS benefit sharing guidelines conducted Number of workshops on resettlement guidelines conducted Number corporate policy for none Completed Completed Completed Completed Completed compensation of RoW prepared and disseminated Recommendations for SESA/CIA guidelines for hydropower development none -- Completed Completed Completed Completed WECS Citizens and/or communities involved in planning / implementation / evaluation of development programs Yes/No Yes Yes Yes Yes Yes WECS, *: text are the targets achieved so far. 8