Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-H6200) ON A GRANT

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-H6200) ON A GRANT IN THE AMOUNT OF SDR 3.4 MILLION (US$5.0 MILLION EQUIVALENT) TO THE KINGDOM OF TONGA FOR AN TONGA ENERGY SECTOR DEVELOPMENT POLICY OPERATION June 27, 2012 Energy Unit Timor-Leste, Papua New Guinea, and Pacific Islands Country Unit Sustainable Development Department East Asia and Pacific Region 1

2 CURRENCY EQUIVALENTS (Exchange Rate Effective JUNE ) Currency Unit = pa anga (TOP) TOP 1.00 = US$0.588 US$1.00 = TOP 1.70 FISCAL YEAR July 1 June 30 ABBREVIATIONS AND ACRONYMS ADB AusAID CAS DPO DSM ERO GDP GoT IPP ISR M&E NRBT OPR PAD PD PDO PEFA PEFM PFM PER PRIF PV SDR TERM TERM-A TERMC TERM-IRFSP Project TERM-IU TESDPO TGIF TPL Asian Development Bank Australian Agency for International Development Country Assistance Strategy Development Policy Operation Demand Side Management Economic Recovery Operation Gross Domestic Product Government of Tonga Independent Power Producer Implementation Status Reports Monitoring and Evaluation National Reserve Bank of Tonga Operational Procurement Review Program Appraisal Document Program Document Program Development Objective Public Expenditure and Financial Accountability Public Expenditure and Financial Management Public Financial Management Public Expenditure Review Pacific Region Infrastructure Facility Photovoltaic Special Drawing Rights Tonga Energy Road Map Tonga Energy Road Map Agency Tonga Energy Road Map Committee Tonga Energy Road Map Institutional and Regulatory Framework Strengthening Tonga Energy Road Map Implementation Unit Tonga Energy Sector Development Policy Operation Tonga Green Initiative Fund Tonga Power Ltd Vice President: Country Director: Sector Director: Sector Manager: Project Team Leader: ICR Team Leader: Pamela Cox Ferid Belhaj John Roome Charles Feinstein Roberto G. Aiello Roberto G. Aiello 2

3 Datasheet KINGDOM OF TONGA TN- ENERGY SECTOR DEVELOPMENT POLICY OPERATION CONTENTS A. Basic Information... 4 B. Key Dates... 4 C. Ratings Summary... 4 D. Sector and Theme Codes... 5 E. Bank Staff... 5 F. Results Framework Analysis... 6 G. Ratings of Program Performance in ISRs... 9 H. Restructuring (if any) Program Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Bank Lending and Implementation Support/Supervision Processes Annex 2. Beneficiary Survey Results Annex 3. Stakeholder Workshop Report and Results Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Annex 6. List of Supporting Documents Annex 7. MAP

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5 A. Basic Information Country: Tonga Program Name: Tonga Energy Development Policy Operation Program ID: P L/C/TF Number(s): IDA-H6200 ICR Date: 06/26/2012 ICR Type: Core ICR Lending Instrument: DPL Borrower: KINGDOM OF TONGA Original Total Commitment: Revised Amount: XDR 3.40M Implementing Agencies: Ministry of Finance and National Planning Cofinanciers and Other External Partners: XDR 3.40M Disbursed Amount: XDR 3.40M B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 06/24/2010 Effectiveness: 01/14/ /10/2010 Appraisal: 08/27/2010 Restructuring(s): Approval: 10/19/2010 Mid-term Review: Closing: 06/30/ /30/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Low or Negligible Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory 4

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation Performance Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status: No No Indicators QAG Assessments (if any) Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration General energy sector Theme Code (as % of total Bank financing) Infrastructure services for private sector development Other economic management Public expenditure, financial management and procurement E. Bank Staff Positions At ICR At Approval Vice President: Pamela Cox James M. Adams Country Director: Ferid Belhaj Ferid Belhaj Sector Manager: Charles M. Feinstein Charles M. Feinstein Program Team Leader: Roberto Gabriel Aiello Wendy E. Hughes ICR Team Leader: ICR Primary Author: Roberto Gabriel Aiello Sati Achath Viju C. Ipe 5

7 F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The development objectives are to contribute to reducing Tonga's fiscal deficit and to support the Government's efforts in implementing reforms in the energy sector which will contribute to achieving steady and stable growth in the medium term. Revised Program Development Objectives (if any, as approved by original approving authority) The Program Development objectives were not revised. (a) PDO Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Original Target Values (from Baseline Value approval documents) TERM-C Membership expansion In adequate energy sector coordination and oversight TERM-C membership expanded to include petroleum sector entities and fulfilling its mandate. Formally Revised Target Values Actual Value Achieved at Completion or Target Years The TERM-C now includes all ministries and government entities in the petroleum sector, and is fulfilling its mandate. Date achieved 08/30/ /30/ /30/2011 Comments (incl. % achievement) The TERM-IU established but was not Achieved. TERM-C is policy management and oversight body within the TERM Agency (TERM-A). For discussion of the specific mandate of TERM-C, see Sections 2.4 and 3.5bb). Indicator 2 : TERM Implementation Unit (TERM-IU) staffing and resources Value (quantitative or Qualitative) TERM Inadequate energy Implementation sector coordination and Unit is adequately oversight staffed and resourced TERM-IU still has some temporary gaps in staffing and resources, which are being addressed. Date achieved 08/30/ /30/ /30/2011 Mostly achieved. At closing, the TERM-IU was in place and functioning, with Comments some gaps in staffing. An interim director was appointed in Feb A (incl. % permanent director will be recruited by July 2012.TERM (IU) is functioning achievement) adequately. Indicator 3 : Monitoring and evaluation framework Value Inadequate energy A monitoring and M&E framework in 6

8 (quantitative or Qualitative) sector data availability is a significant impediment to least cost planning evaluation framework for progress in the energy sector (electricity and petroleum) reforms is in place place and providing regular monitoring and reporting of energy sector data. Date achieved 08/30/ /30/ /30/2011 Comments (incl. % achievement) Achieved. Indicator 4 : Tonga Power Ltd (TPL) audit reports Value (quantitative or Qualitative) Only incomplete financial data was available on the privately owned electricity utility that preceded the stateowned TPL. Audit accountability and oversight weak. TPL FY09/10 audit report and subsequent audit reports submitted to auditor General's office on time. FY09/10 audit report submitted on time, and with better quality than previous report. FY10/11 report (due after closing) also submitted on time. Date achieved 08/30/ /30/ /30/2011 Comments (incl. % achievement) Indicator 5 : Value (quantitative or Qualitative) Achieved. The FY08/09 audit, a prior condition for release of the singletranche DPO, was submitted on time, but was limited by poor information inherited by TPL. More timely and better quality audits have improved transparency and accountability. Transactions with independent power producers (IPPs) Transactions involving private sector participation in the energy sector No transparent process handled in a to ensure cost-effective transparent development of domestic renewable energy by IPPs. manner, demonstrating adequate protection of the interests of electricity consumers in Tonga. Transactions involving private sector participation in the energy sector handled transparently and in compliance with Tonga's new Public Procurement Regulations and budget disclosure requirements. Date achieved 08/30/ /30/ /30/2011 Comments (incl. % Achieved. improved fiscal transparency in the energy sector achievement) 7

9 Indicator 6 : Value (quantitative or Qualitative) Price risk management No petroleum price risk management in place Initial petroleum price risk management approach tested and evaluated. Testing and evaluation of petroleum price risk management program is on track. Amended the petroleum pricing templates in general accordance with the recommendations of independent reviews. Date achieved 08/30/ /30/ /30/2011 Amended templates help reduce economic vulnerability to energy price Comments fluctuations. Medium-term (3-yr) goals beyond DPO include an end-use (incl. % efficiency program (5% gains) and generating 5% of electricity from domestic achievement) renewable energy sources. Indicator 7 : Financial planning and management Value (quantitative or Qualitative) Procedures for budget preparation and execution not formally in place. Corporate plans and annual management plans of key ministries, submitted as part of the preparation process for the FY11/12 and subsequent budgets. Corporate and annual management plans submitted as part of FY11/12 budget preparation process. Date achieved 08/30/ /30/ /30/2011 Achieved. The GOT instituted a budget reporting system that tracks budget Comments information, corporate plans and annual management plans, and reformed (incl. % the budget calendar to help incorporate these inputs. Budget proposals are achievement) also made available to the public. Indicator 8 : Procurement regulation Value (quantitative or Qualitative) Public procurement based on policy guidelines rather than formal regulations. New Public Procurement Regulations in use by Government. New regulations adopted and in use. Date achieved 08/30/ /30/ /30/2011 Comments (incl. % achievement) Achieved. At appraisal, the draft regulations were under review by the Law Committee (a prior condition for the DPO tranche). They were approved by the Cabinet in 2012 and are now in use, with ongoing support from the ADB. 8

10 (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Original Target Values (from Baseline Value approval documents) Monitoring and evaluation framework Inadequate energy sector data availability is a significant impediment to least cost planning A monitoring and evaluation framework for progress in the energy sector (electricity and petroleum) reforms is in place Formally Revised Target Values Actual Value Achieved at Completion or Target Years M&E framework in place and providing regular monitoring and reporting of energy sector data. Date achieved 08/30/ /30/ /30/2011 Comments (incl. % achievement) Achieved G. Ratings of Program Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) H. Restructuring (if any) Not Applicable 9

11 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal Macroeconomic Background: Tonga is a small and remote island economy, with a per capita income of approximately US$3,347 in Over the past 15 years, per capita income has grown modestly, with average real annual growth of around 1.9 percent exceeding population growth of about 0.5 percent. Economic activity has exhibited significant fluctuations as underlying structural constraints, political disturbances, and global economic developments have adversely affected growth. Although the economy recovered strongly in FY2007/08, growth has subsequently slowed, initially due in large part to the food and fuel price shocks and more recently as a result of the global slowdown, which hurt remittance flows, tourism arrivals and exports. Tonga is highly vulnerable to external economic shocks and natural disasters. Remittances account for a large share of the GDP. Size and remoteness also have an impact on the cost of key imports such as petroleum, exacerbating the risk to the economy from external shocks. All these vulnerabilities have come into play in the recent past, taking a heavy toll on Tonga s economy. The knock-on effects of the global economic crisis (GEC) resulted in a 0.48 percent contraction of Tonga s GDP in The main impact of the crisis was on remittances, 0074ourism receipts and value of exports. The current account deficit widened to 17.4 percent of GDP in FY2009/10 compared with 14.3 percent in the previous year. However, the trade deficit and the international reserves position have improved marginally in recent years. Inflation, following the trend of international oil and food prices, reached 12 percent in mid-2008, fell to 1.2 percent by the end of 2009, but picked up to around 4 percent in During FY2009/10 the National Reserve Bank of Tonga (NRBT) lowered reserve requirements (from 10 percent to 5 percent), reduced the interest rate on its repo 1 facility (from 10 percent to 4½ percent), and stopped issuing central bank bills. In the last three years, the global downturn has pushed government finances into deficit equal to 3.3 percent of GDP in FY2008/09, and increased to 3.9 percent of GDP in FY2009/10. In both years, tax revenues were significantly lower than in previous years. On the expenditure side, in the FY2010/11 budget, the government has adopted realistic revenue forecasts and has extended its recent efforts to rationalize expenditure. A Public Expenditure and Financial Accountability (PEFA) assessment was first undertaken in Tonga in 2007 which indicated that the Public Financial Management legal and regulatory framework in Tonga provides a solid basis for budgeting, spending and accountability and there are clear rules and procedures in place and these tend to be followed. 1 The term repo refers to a practice in which a bank or other financial institution buys securities with the proviso that the seller repurchases the same securities for an agreed-upon price on a certain day more than one day after the establishment of the agreement. 10

12 Energy sector background Petroleum: Petroleum is supplied to Tonga by two international oil companies, TOTAL and Pacific Energy. Uata Shipping, Otumotuanga ofa and other locally owned small ferry companies are still used for fuel distribution in the Ha apai group of islands. LPG is bulk supplied by Tonga Gas (a subsidiary of Fiji Gas, 51% owned by Origin Energy, Australia), and marketed and distributed onshore by the GOT s Homegas Company. Tonga faces a long supply chain from the refinery source. The outer islands are supplied with products trans-shipped through Nuku alofa. The Niua's and 'Eua islands are normally the only areas for which main products (gasoline, Automotive Diesel, and kerosene) are supplied by drum. The Tonga Competent Authority regulates the retail price of petroleum products, using a pricing template originally developed by the Pacific Islands Forum Secretariat. The pricing template builds up the retail prices by taking the Singapore price for fuel, then adding on shipping and storage fees and wholesale and retail markups. In effect, the average price for the next month is determined by fuel prices, shipping rates and margins two months prior. Wholesale and retail fuel prices across Tonga vary, reflecting the higher transport costs to provinces distant from the main island, Tongatapu. Grid-connected Electricity: The Electricity Act 2007 provides the governance framework for the grid-connected electricity sector in Tonga with generation and supply by Tonga Power Limited (TPL) a state enterprise wholly owned by GOT. TPL operates four grids in Tonga: the largest on Tongatapu, and three smaller grids on the main islands of the Vava u and Ha apai island groups, and on the island of Eua. Electricity sector data is quite limited at present. Improving data generation and collection is an activity identified for early implementation under the Tonga Energy Road Map (TERM), a sector strategy developed by Tonga in partnership with the World Bank and other donors and formally adopted by the government in August Off-Grid Electricity Supply: A Renewable Energy Bill was developed prior to the TERM process and passed by parliament in 2009 to provide a legal framework to promote the utilization of renewable energy in Tonga through the creation of an enabling market environment. The bill created a Renewable Energy Authority within the Ministry of Lands, Survey and Natural Resources to deal with matters concerning supply of renewable energy. The outer islands of Tonga are a group of 26 islands, scattered throughout the three primary island groups, which do not have reticulated diesel generated electricity. The approach set out in the TERM is to supply all households in the outer islands with electricity generated almost 100% by renewable energy sources, currently being generated using diesel. However, since only 6% of Tonga s population live on the outer islands, this will have little if any impact on reducing diesel use. The focus of renewable energy generation has mainly been on solar energy. Rationale for Bank assistance: The Tonga Energy Development Policy Operation was consistent with the Tonga Country Assistance Strategy (CAS). Key themes running through Bank Group 11

13 engagement with Tonga include: (a) Supporting policy reform to strengthen growth prospects and improve service delivery; (b) Generating opportunities through greater global and regional integration; and (c) Building resilience against shocks. This operation directly supported themes (a) and (c). The Tonga Energy Road Map sets out the institutional, legal and policy areas of reform needed to reduce Tonga s vulnerability to oil price shocks and achieve an increase in quality access to modern, quality energy services, both of which are necessary to strengthen prospects for equitable growth and improve service delivery. The focus of the TERM is on petroleum supply chain efficiency, petroleum price risk management, increased efficiency in electricity supply and diversifying Tonga s electricity supply and directly addresses the theme of building resilience against shocks, specifically oil price spikes. The operation was an integral part of the Bank s ongoing overall engagement in the energy sector and it reinforced the importance of adhering to the objectives, principles and strategy set out in the TERM. It highlighted the adoption of the TERM as a key prior action of a budget support operation and reinforced the reality that the energy sector issues addressed under the TERM are critical to overall macroeconomic growth and stability. The approach and program set out in the TERM were also fully in line with the institutional agenda on climate change, integrating energy efficiency and renewable energy generation into the mainstream sector planning and policy framework, through the focus on reducing vulnerability to oil price rise and shocks as a key factor in enhancing national energy security. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) Program development objectives: The program development objectives are to contribute to reducing Tonga s fiscal deficit and to support the Government s efforts in implementing reforms in the energy sector which will contribute to achieving steady and stable growth in the medium term. Key indicators The key results indicators listed in Annex 1 of the Program Document (PD) are: (a) TERM-C membership expanded to include petroleum sector entities and fulfilling its mandate; (b) TERM Implementation unit is adequately staffed and resourced; (c) A monitoring and evaluation framework for progress in the energy sector (electricity and petroleum) reforms is in place; (d) TPL FY09/10 audit report and subsequent audit reports submitted to auditor General s office on time; (e) Transactions involving private sector participation in the energy sector handled in a transparent manner, demonstrating adequate protection of the interests of electricity consumers in Tonga; (f) Initial petroleum price risk management approach tested and evaluated; 12

14 (g) Corporate plans and annual management plans of key ministries, submitted as part of the preparation process for the FY11/12 and subsequent budgets; and (h) New Public Procurement Regulations in use by Government. The PD Data Sheet had a different list of four KPIs (also included in Annex 1), that were focused on five-year outcomes. These indicators were not intended to be treated as KPIs to be achieved by the operation directly, nor could they be measured or treated as such since the time frame was well beyond the closing date of the operation. Rather, they were described as medium term goals toward which the operation will contribute : (a) Petroleum imports for electricity generation relative to a "business as usual" scenario are reduced by 15% in a cost-effective manner; (b) Diversification of sources of electricity generation to improve energy security and reduce impact of oil price on the price of electricity supply; (c) Petroleum price risk management in place; and (d) Fiscal consolidation achieved including reduction in risk of debt distress. The Program Document (PD) originally approved lists these indicators as the ones for the TESDPO. But it may be noted that the actual KPIs are the ones listed in Annex 1 of the PD. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification The PDOs was not revised. 1.4 Original Policy Areas Supported by the Program (as approved) The broad policy areas supported included: (a) strengthening growth prospects and improve service delivery; and (b) building resilience against shocks. The operation supported policy and institutional measures that will help Tonga sustain its reform momentum in the energy sector and implement recommendations from the 2010 Public Expenditure and Financial Accountability Assessment. The operation also provided short-term fiscal relief to address the budget deficit projected for FY10/11 as key determinants of government revenue, particularly remittances, remain well below normal levels as a result of the global economic slow-down. The operation included broad actions related to: (a) Energy sector reform to reduce Tonga s vulnerability to oil price rise and shocks, and to increase access to quality energy services; and (b) Public Expenditure Financial Management reform (PEFM) which would formalize and make legally binding the required procedures for a number of key PFM processes. On the basis of strong ownership by GOT and harmonization with other development partners the following prior actions for the disbursement of the full amount of the grant were implemented: (a) The Tonga Energy Road Map (TERM) adopted by Cabinet; (b) An intra-governmental mechanism to coordinate energy sector activities across 13

15 government was established and operationalized; (c) The Tonga Power Limited FY08/09 Audit Report submitted to the Auditor General s Office (d) Treasury Instructions to line ministries issued by Ministry of Finance and Planning, and (e) Public Procurement Regulations Submitted to the Law Committee The project contributed to the implementation of the TERM in three phases. A summary of the activities under each of the phases for implementation of the TERM is given below. TERM-Phase 0 The key activities for Phase 0 are: Recommendations from the Petroleum Supply Chain and Price Hedging Study are considered by GOT and decisions made on implementation and initial activities launched. Institutional, legal, policy and regulatory updates for petroleum and electricity implemented, as per issues identified in the TERM. Data gathering activities and data collection and monitoring system in place; Environmental screening of the TERM to identify environmental considerations of the planned activities in the TERM. Analysis of environmental change impact on Tonga to identify any risks to long term safety and security of energy infrastructure. Initial end use efficiency/demand side management program launched and development of data and analysis to design and implement more extensive end use efficiency program underway. Off-grid program launched. Necessary TPL investments for safety, data acquisition and improved efficiency launched. Mechanism to channel available grant assistance to buy down the cost of renewable energy generation and energy efficiency investments is in place (Tonga Green Initiative Fund: TGIF ). TERM-Phase 1 Key activities indicated for Phase 1 are: Implementation of second-generation end-use efficiency / DSM measures; Implementation of up to about 1 megawatt on-grid solar PV. Most of this would be installed on Tongatapu and could include at least one other island grid. Elements including centralized, decentralized and possible battery storage would be appropriate. Operation, maintenance and training contract in place; Implementation of a Proof of Concept Coconut Oil Project. Operation, maintenance and training contract in place; Implementation of Landfill Gas IPP (if resource proved in Phase 0); 14

16 Review of initial experience with petroleum financial risk management and implementation of modifications as required; Transaction advisor for Phase 2 projects selected. TERM-Phase 2 Phase 2 actions included: A formal analysis of the data and findings from the Phase 1 projects. In particular, the success of the loss-reduction programs and the DSM programs should be assessed to identify shortfalls on target energy reductions. The load forecast will be updated to drive the needs and timing of ongoing sector development. The successes and problems with each of the Proof-of-Concept project will be carefully evaluated. New grid system performance data will need analysis to confirm what measures need to be taken and new technology added to ensure that the most practical renewable energy alternative can be successfully integrated. Any promising (but not yet commercial) technologies that have generated a track record in Tonga or elsewhere during the Phase 0 and 1 implementation period, could be evaluated at this point and considered for inclusion in Phase 2; Institutionalize the data collection systems set up during Phase 1. The value of databases is often to be found in their longevity and continuity so as the Tonga economy and energy systems develop, the best data on what can be expected in weather, ocean regimes and electric system performance will ensure that Tonga s continuing efforts to use its domestic energy resources can progress in as timely a manner as possible; A full-scale development of renewable energy projects on an IPP basis, utilizing the Tonga Green Initiative Fund designed and established in Phase 0. Sequencing of the Phase 2 projects will be determined based on the key principles of the TERM, set out at the beginning of this section. 1.5 Revised Policy Areas The policy areas were not revised. 1.6 Other significant changes There was no change in the operation s design, scope and scale, implementing arrangements, or schedule during implementation. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 15

17 The Tonga Energy Sector DPO (TESDPO) was a single-tranche operation of SDR 3.4 million (US$5 million equivalent) approved by the Board of Executive Directors on October 19, The loan agreement was signed on October 19, 2010 and declared effective on November 11, The operation was approved on the basis of completion of the following selected list of prior actions, which were completed prior to disbursement of the single tranche on December 10, 2010: Energy Sector Reform 1. The Recipient has adopted the Tonga Energy Roadmap June 2010, by decision of its Cabinet No. 739, dated August 20, An intra-governmental mechanism to coordinate energy sector activities across Recipient s administration is established and operationalized, pursuant to the terms of the decision of Cabinet of November 25, 2009 and the minutes of the meetings of the Tonga Energy Roadmap Committee dated February 12, 2010 and February 19, The Tonga Power Limited FY08/09 Audit Report was submitted to the Recipient s Auditor General s office. Public Financial Management Reform 4. The Recipient s Ministry of Finance has issued treasury instructions pursuant to Article 45 of the Recipient s Financial Management Act (2002), to the Recipient s line ministries. 5. Recipient s Cabinet has approved the submission of the Public Procurement Regulations to the Law Committee. 2.2 Major Factors Affecting Implementation The implementation of the TESDPO was positively influenced by various factors, including adequate Government commitment, sound background analysis, incorporation of lessons learned from previous operations in Tonga, appropriate design of the operation, and appropriate measures for mitigation of the risks identified. These factors are discussed further below: Adequacy of government's commitment, stakeholder involvement, and participatory processes The government commitment was adequate and satisfactory. The Ministry of Finance, at the request of the Government of Tonga (GOT), effectively supported implementation of policy reforms and programs outlined in the DPO. Soundness of the background analysis underpinning the operation. The main analytical underpinnings to the operation consisted of: the Tonga Energy Road Map (TERM) sector strategy developed by the GOT in partnership with the Bank and other development Partners. It addresses required improvements in the petroleum supply 16

18 chain and consideration of price hedging instruments, increased efficiency both in electricity supply and use, development of grid-connected domestic renewable energy resources, improved access to quality electricity services in remote areas, reduced environmental impacts both locally and globally, enhanced energy security, and overall sector financial viability. The TERM focuses on reducing cost and volatility in the price of petroleum imports and on de-linking electricity production from petroleum to the extent feasible. It also sets out priority actions in the areas of policy, legal, regulatory and institutional arrangements, and sets out an investment program based on a least cost approach for reducing reliance on diesel for power generation, with explicit consideration given to managing risk through development of a portfolio of options to meet the demand for electricity. The TERM also recommends a detailed program of actions with indicative funding sources and costs for each element. Lessons learned from previous operations. Since Tonga became a member of the World Bank Group in 1985, the Bank has invested in the Tonga Development Bank, Cyclone Emergency Recovery, and the health, education, transport, telecommunication and energy sectors. Recent and planned Bank Group support has focused predominantly on policy reforms to strengthen infrastructure services, including through greater involvement by the private sector in addition to the Economic Recovery Program. In the energy sector the Bank Group collaborated with the GOT and other development partners in the development of the TERM. In addition to the investments and activities described above, the Bank has also provided analytical support that included: Expenditure and Financial Accountability (PEFA) as a joint exercise by the Government of Tonga and development partners including two experts engaged by AusAID and the ADB/World Bank Focal Point in Tonga. An Operational Procurement Review (OPR) carried out in A Macro-Fiscal Analysis paper jointly with the GOT to identify and explain recent trends in revenue, expenditure and overall fiscal performance in A Medium-Term Expenditure Mapping exercise jointly with the GOT in order to provide a foundation for improving the quality of public spending. Two of the key lessons learned from the above operations that were relevant to the energy sector DPO included: The overarching priorities in the energy sector are to reduce Tonga s vulnerability to oil price rise and price shocks and achieve an increase in quality access to electricity services in an environmentally and financially sustainable manner. Financial sustainability and transparency are important components of a longer term strategy to attract credible private sector and maximize the benefits from private sector involvement in the energy sector. 17

19 These lessons were taken into account by the GOT in development and implementation of this DPO. Assessment of the operation s design The TESDPO s design was appropriate and reinforced the importance of addressing energy sector weaknesses as a necessary condition for economic growth and stability by adhering to the objectives, principles and strategy set out in the TERM. This operation was an integral part of the Bank s ongoing overall Country Assistance Strategy ( ) and engagement in the energy sector. The operation, in particular, supported the CAS s strategic objective of reducing reliance imported fuel that is highly vulnerable to price volatility and increasing the affordability of energy. The operation has also served as a vehicle to strengthen the Bank s dialogue with the GOT in areas of public expenditure and financial management. It set the stage for a more robust engagement in PEFM going forward, particularly in the area of joint public expenditure analysis which will be especially important as the new Government works to rationalize expenditures while maintaining and improving core service delivery functions in the medium term. Relevance of the risks identified at appraisal and effectiveness of mitigation measures The operation faced the following risks and the respective mitigation measures adopted are presented below: The need to address immediate budget shortfalls could distract the new administration from focusing on the implementation of critical energy sector reforms, as per the TERM, needed to support medium term economic stability and growth. Budget pressures could also result in insufficient resources being available for the GOT s role in implementation of the TERM. o Mitigating measure: To mitigate this risk, of budget shortfalls, the Bank and other development partners developed budget support programs. The IDA grant for the Economic Recovery Operation is a measure in this direction. Delays in implementation by the new and inexperienced administration and lack of appreciation of the importance of focusing on energy sector reforms. o Mitigating measures: Preparation of the energy Sector Investment operation, strong development partner coordination around the development of the TERM and the commitment to provide support in line with implementation of the TERM. Other mitigation measures included emphasis by the Bank and other development partners on maintaining the focus on energy sector reforms, adhering to the principles set out in the TERM, and stressing the wide range of benefits and importance of its successful implementation. 18

20 Natural Disasters and Climate Change negatively impact the expected benefits associated with implementation of the planned energy sector reforms. o Mitigating measures: Analyzed environmental and climate change impact on Tonga to identify any risks to long term safety and security of energy infrastructure Poor progress on Public Financial Management reforms and lack of financial transparency. o Mitigating measures: Partnerships with the GOT and other development partners in implementing improvements in the areas of public expenditure and financial management. Other positive factors: The country moving from constitutional monarchy to democracy and the smooth transition and the resulting political change affected implementation of the operation in a positive way. The Bank s opening of a liaison office in Tonga jointly with the Asian Development Bank (ADB) was a great facilitator both in the design and roll out of the operation. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: Design The outcomes from the operation were monitored using the indicators outlined in Annex 1 of the Program Document (PD). Prior to the disbursement a set of prior actions were developed for implementation. There were eight key performance indicators, six of which focused on the energy sector, and two on public financial management reform. The indicators for the energy sector were (a) expansion of the TERM-C membership to include petroleum sector entities and fulfilling its mandate; (b) adequate staffing and resources for the TERM Implementation unit; (c) a monitoring and evaluation framework for progress in the energy sector (electricity and petroleum); (d) TPL FY09/10 audit report and subsequent audit reports submitted to auditor General s office on time; (e) transactions involving private sector participation in the energy sector handled in a transparent manner, demonstrating adequate protection of the interests of electricity consumers in Tonga, and (f) testing and evaluation of the initial petroleum price risk management approach. The above indicators were relevant to the PDO s and were attributable to the TESDPO. Expansion of the TERM-C membership to include all ministries and entities involved in 19

21 the energy sector was important in collective decision making and further development of the TERM and its implementation. The TERM-IU was not adequately staffed and proper staffing and allocation of adequate resources were crucial for success in TERM implementation. Preparation and submission of audit reports for the TPL and transparency regarding transactions involving private sector participation are indicators to further improve the fiscal transparency of the energy sector and hence are very relevant in the monitoring and evaluation. Development and evaluation of the petroleum price risk management framework feeds into the long-run objective of a sustainable energy sector. All of the above indicators were observable and were closely monitored. The indicators for the public financial management reform were (a) corporate plans and annual management plans of key ministries submitted as part of the preparation process for the FY11/12 and subsequent budgets and (b) new Public Procurement Regulations in use by Government. Corporate and annual management plans further strengthened the annual budget development and planning process, while new procurement regulations were designed to help ensure more accountability and transparency. Implementation: Monitoring and evaluation activities were carried out by the task team in partnership with the Ministry of Finance on the basis of the agreed-up on activities and indicators. Since this was a single-tranche operation, there were no Implementation Status Reports (ISRs). However, the implementing agency provided all the information regarding disbursement and utilization of the funds disbursed. The implementing agency also provided regular and reliable documentation on progress in TERM implementation and the energy sector reform program. Although they were not identified as intermediate indicators, monitoring the detailed activities for implementing the three phases of the TERM provided a very valuable means of tracking progress toward the KPIs and PDO, and their progress was a reflection of both the general effectiveness of the TERM Committee and Implementation Unit as well as their planning, procurement, and management performance. Utilization Appropriate data collected by the government on the indicators were evaluated and used during supervision missions, and also for decision-making on policy work. The information provided was used in dialogue with the government in further shaping the Energy Road Map, development of institutions for TERM implementation, and follow-up support projects in the energy sector. As detailed in Section 1.4, some of the activities in the TERM implementation plan were explicitly designed to test approaches and feed information back into subsequent phases, regulatory development, implementation strategies, and fine-tuning of the TERM itself. 2.4 Expected Next Phase/Follow-up Operation (if any): 20

22 The TESDPO was a single-tranche operation and there are still a number of challenges that are fundamental to the development of the energy sector in Tonga. The follow-up operations include: TERM Institutional and Regulatory Framework Strengthening Project (TERM-IRFSP): The proposed development objective is the strengthening of the institutional and regulatory framework of the Tonga Energy Road Map. It will provide assistance to strengthen the core institutions and regulatory framework relating to TERM and it is a key precursor for the ongoing and planned operations under the Energy Road Map. (i) Strengthening the Energy Sector Framework and Structure. This component will be implemented by TERM-IU and will focus on strengthening the functioning of the unit, and on technical assistance supporting the areas of energy sector policy; environmental and social safeguards frameworks; petroleum price risk management strategy; and developing a Communication Plan for TERM. (ii) Preparing TPL for Renewable Energy Supply. This component will be implemented by TPL and will focus on technical assistance for designing upgrades to the networks and systems operations procedures and developing a least-cost generation and associated network development plan for the period of five years. Tonga Economic Recovery Operation (ERO): In addition to strengthening public financial management and fiscal policy, the ERO, further supports structural reforms in the energy sector. The specific policy actions in the energy sector include a reformed electricity tariff that provides full cost recovery financial incentives for improving efficiency in generation and distribution; regulatory framework for the petroleum sector; and advancing public enterprise reforms in the energy sector like transparency of accounts/audits of the TPL initiated as part of the DPO. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The objectives of the TESDPO are clear, relevant to the Bank group s engagement in Tonga. The operation served as an integral part of the Bank s on-going overall engagement in the energy sector. It supported policy and institutional measures that helped Tonga sustain its reform momentum in the energy sector and implement recommendations from the 2010 Public Expenditure and Financial Accountability Assessment. The operation also provided short-term fiscal relief to address the budget deficit projected for FY10/11 as key determinants of government revenue, particularly 21

23 remittances, remain well below normal levels as a result of the global economic slowdown. The objectives and the implementation of the activities continue to be very relevant through implementation of the TERM that sets out a ten year road map to reduce Tonga s vulnerability to oil price shocks and achieve an increase in quality access to modern energy services in an environmentally sustainable manner. As the objectives continue to be relevant, the Bank continues to support activities in the energy sector through the TERM-IRFSP and the ERO with an energy sector component. 3.2 Achievement of Program Development Objectives The DPO had significant impact on the implementation of TERM by the GOT. All the indicators suggest that the TESDPO has been successful in sustaining the reform momentum in the energy sector and in implementing recommendations from the 2010 Public Expenditure and Financial Accountability Assessment. The operation also provided short-term fiscal relief to address the budget deficit projected for FY10/11 as key determinants of government revenue. The two main objectives were to (a) help reduce Tonga s fiscal deficit, and (b) support implementation of reforms in the energy sector. Both objectives were intended to contribute to achieving steady and stable growth in the medium term. Objective 1: Contribute to reducing Tonga s fiscal deficit The DPO was intended to provide budget support to implement the FY10/11 budget when the country was undergoing transition to the new government and was facing fiscal deficit and macroeconomic instability. The budget support contributed to providing the resources necessary to implement the FY10/11 budget and thus facilitated the critical energy sector program to remain front and center of the policy agenda in Tonga. Had the budget not been provided through the TESDPO, the precarious fiscal deficit and the macroeconomic instability could have diverted funds away from the energy sector and thus could have derailed the energy sector reform programs. Thus the DPO supported in sustaining the reform momentum in the energy sector. Adoption of the TERM and implementation of a formal arrangement for coordination and oversight across the energy sector set in motion actions to improve the efficiency, cost-effectiveness and transparency of the sector institutions, investments and operation. The operation has also served as a vehicle to strengthen the Bank s dialogue with the GOT in areas of public expenditure and financial management, particularly in the area of joint public expenditure analysis. Objective 2: Support the Government s efforts in implementing reforms in the energy sector. The cornerstone of this operation was its support for the TERM which the GOT adopted in August The TERM is a landmark energy sector policy developed through 22

24 unprecedented cooperation between the GOT and its development partners and coordination among the ministries/departments within the Tongan government. TERM lays out a least cost approach and implementation plan to reduce Tonga s vulnerability to oil price shocks and achieve access to modern energy services. A summary of the achievement of outcome indicators targets is presented below: An intra-governmental mechanism to coordinate energy sector activities across Recipient s administration is established and operationalized, pursuant to the terms of the decision of Cabinet of November 25, 2009 and the minutes of the meetings of the TERM Committee dated February 12, 2010 and February 19, The Tonga Power Limited FY08/09 Audit Report was submitted to the Recipient s Auditor General s office. The Recipient s Ministry of Finance has issued treasury instructions pursuant to Article 45 of the Recipient s Financial Management Act (2002), to the Recipient s line ministries. Recipient s Cabinet has approved the submission of the Public Procurement Regulations to the Law Committee. 3.3 Justification of Overall Outcome Rating Rating: Satisfactory As discussed in Section 3.2, the objectives of the TESDPO remain highly relevant to Tonga s current priorities and the overarching themes in the Bank s CAS. The operation contributed to strengthening and implementation of the TERM. The operation has also served as a vehicle to strengthen the Bank s dialogue with the GOT in areas of public expenditure and financial management, through more robust engagement in PEFM in the area of joint public expenditure analysis. The dialogue led to the development and implementation of the Tonga ERO, TERM-IRFSP and the associated Technical Assistance projects. The objectives of the TESDPO are clear, relevant to the Bank group s engagement in Tonga. The operation served as an integral part of the Bank s ongoing overall engagement in the energy sector. It supported policy and institutional measures that helped Tonga sustain its reform momentum in the energy sector and implement recommendations from the 2010 Public Expenditure and Financial Accountability Assessment. The operation also provided short-term fiscal relief to address the budget deficit projected for FY10/11 as key determinants of government revenue, particularly remittances, remain well below normal levels as a result of the global economic slowdown. By contributing to reduction of the fiscal deficit and supporting reform in the energy sector, the operation has helped Tonga establish a stronger foundation for achieving the higher level objective of more stable and steady economic growth in the medium term. 23

25 The objectives and the implementation of the activities continue to be very relevant through implementation of the TERM that sets out a ten-year road map to reduce Tonga s vulnerability to oil price shocks and achieve an increase in quality access to modern energy services in an environmentally sustainable manner. As the objectives continue to be relevant, the Bank continues to support activities in the energy sector through the TERM-IRFSP and the ERO with an energy sector component. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development Poverty impact: The TESDPO generated indirect impacts on the poor by reducing household expenditure on electricity services through reduced cost of supplying electricity by way of improved end-use efficiency. Improvements in end-use efficiency reduce the amount of electricity required to achieve a given level of electricity services thus reducing household expenditures on electricity services. As the TERM implementation progresses there will be further improvements in efficiency and such impacts will become more perceptible. The TERM implementation supported by this DPO also reduced volatility in prices of diesel which in turn reduced fluctuations in electricity prices. Stability in prices for electricity reduced variations in household expenditures for electricity services so that the poor households facing a tight budget constraint could better plan for expenditures on electricity services. The Off-Grid Initiative which is being implemented as part of the TERM will provide remote communities with access to electricity from renewable sources that are sustainable and also provide for their varied power needs. This program will increase economic activity of the outer islands communities through a novel tiered approach which in turn will increase incomes and will have an impact on poverty. The budget support helped the government, which was facing fiscal deficit, to continue with the implementation of the social programs particularly in the health sector which benefited the poor and lower income groups. In addition, the project also benefited the education sector. The TESDPO is expected to generate indirect impacts on the poor by supporting the GOT s continued efforts on implementing the Tonga Energy Road Map (TERM), which will lead to: reducing household expenditure on electricity services through reduced cost of supplying electricity by way of improved end-use efficiency. Improvements in end-use efficiency reduce the amount of electricity required to achieve a given level of electricity services thus reducing household expenditures on electricity services. As the TERM implementation progresses there will be further improvements in efficiency and such impacts will become more perceptible. 24