IMPLEMENTATION COMPLETION AND RESULTS REPORT (TF-58084) ON A GRANT IN THE AMOUNT OF US$ 5 MILLION TO THE LEBANESE REPUBLIC FOR THE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR2675 IMPLEMENTATION COMPLETION AND RESULTS REPORT (TF-58084) Sustainable Development Department Middle East and North Africa Region ON A GRANT IN THE AMOUNT OF US$ 5 MILLION TO THE LEBANESE REPUBLIC FOR THE EMERGENCY POWER SECTOR REFORM CAPACITY REINFORCEMENT PROJECT June 20,

2 CURRENCY EQUIVALENTS Exchange Rate Effective June 18, 2013 Currency Unit = Lebanese Pound 1.00 = US$ US$ 1.00 = 1, ABBREVIATIONS AND ACRONYMS CAS CDR DSP DPL EdL ESIA FM FSRU GoL HCP ISN ISR LNG MMHLC MOEW PDO PPES PRG T&D TFL WB Country Assistance Strategy Council for Development and Reconstruction Distribution Service Provider Development Policy Loan Lebanese Power Company ( Electricité du Liban ) Economic and Social Impact Assessment Financial Management Floating Storage and Regasification Unit Government of Lebanon Higher Council for Privatization Interim Strategy Note Implementation and Status Report Liquefied Natural Gas Multi-Ministry Higher Level Committee Ministry of Energy and Water Project Development Objective Policy Paper for the Electricity Sector Partial Risk Guarantee Transmission and Distribution Trust Fund for Lebanon World Bank Vice President: Country Director: Sector Manager: Project Team Leader: ICR Team Leader: Inger Andersen Ferid Belhaj Charles Joseph Cormier Simon J. Stolp Daniel Camos Daurella 2

3 LEBANESE REPUBLIC Emergency Power Sector Reform Capacity Reinforcement Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project 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 on Issues Raised by Borrower/Implementing Agencies Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Summary of the Government of Lebanon 2010 Policy Paper for the Electricity Sector Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Summary of Borrower's ICR Annex 6. List of Supporting Documents Annex 7: Results Framework Indicators dropped at 2010 restructuring MAP 3

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5 A. Basic Information Country: Lebanon Project Name: LB-EMERGENCY POWER SECTOR REFORM CAPACITY REINFORCEMENT Project ID: P L/C/TF Number(s): TF ICR Date: 04/02/2013 ICR Type: Core ICR Lending Instrument: ERL Borrower: Original Total Commitment: Revised Amount: USD 5.00M Environmental Category: C GOVERNMENT OF LEBANON (GRANT RECIPIENT) USD 5.00M Disbursed Amount: USD 5.00M Implementing Agencies 1 : Council for Development & Reconstruction (CDR) Cofinanciers and Other External Partners: French Development Agency (AFD) B. Key Dates Process Date Process Original Date Concept Review: 01/08/2007 Effectiveness: 08/07/2007 Revised / Actual Date(s) Appraisal: 01/16/2007 Restructuring(s): 06/20/ /22/ /29/2010 Approval: 03/19/2007 Mid-term Review: 08/04/2010 Closing: 06/30/ /31/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Substantial Moderately Satisfactory Moderately Satisfactory 1 According to Article II of the Trust Fund for Lebanon Grant Agreement signed on May 7, However, three arms of the Government were highly involved in managing some of this project, but these entities will be considered to be the Government for the purposes of this document. These were: 1) the Ministry of Energy and Water; 2) the Higher Council for Privatization; and 3) Electricite du Liban. 4

6 C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project Yes at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: Yes Moderately Satisfactory 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 Energy efficiency in Heat and Power Transmission and Distribution of Electricity Theme Code (as % of total Bank financing) Infrastructure services for private sector development Other public sector governance Regulation and competition policy E. Bank Staff Positions At ICR At Approval Vice President: Inger Andersen Daniela Gressani Country Director: Ferid Belhaj Joseph P. Saba Sector Manager: Charles Joseph Cormier Jonathan D. Walters Project Team Leader: Simon J. Stolp Anna M. Bjerde ICR Team Leader: ICR Primary Author: Daniel Camos Daurella Daniel Camos Daurella 5

7 F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The objective of the project is to accelerate the implementation of reforms and restructuring of EdL by enhancing the capacity of MOEW, EdL and the multi-ministry higher level committee. Revised Project Development Objectives (as approved by original approving authority) Below are the PDO and intermediate indicators of the post 2010 project restructuring, which were aimed at clarifying and making more measureable the original ones. The indicators dropped during the 2010 restructuring can be found in Annex 7. (a) PDO Indicator(s) Indicator Baseline Original Target s (from approval documents) Formally Revised Target s Actual Achieved at Completion or Target Years Indicator 1 : Roadmap for EdL restructuring/corporatization finalized and agreed across Government. The roadmap for EdL restructuring has been finalized. However, although a crossministerial quantitative or Qualitative) 0% 100% committee was established to oversee the planning, it is not clear that there was consensus neither amongst this comittee nor amongst wider government. Date achieved 12/29/ /31/ /31/2012 (incl. % Partially achieved. Indicator 2 : Final decision to proceed with development of alternate fuel supply (LNG) in the context of a broad fuel supply strategy. The decision has been taken to quantitative or Qualitative) 0% 100% proceed with LNG terminal, and procurement has started. Date achieved 12/29/ /31/ /31/2012 (incl. % Achieved. 6

8 Indicator Baseline Original Target s (from approval documents) Formally Revised Target s Actual Achieved at Completion or Target Years Indicator 3 : Progress in implementation of policy directions outlined in the Government of Lebanon's Policy Paper for the Electricity Sector (PPES). Broad and significant progress has been made on implementation of the PPES quantitative or 0% 100% (e.g. distribution service Qualitative) providers or rehabilitation and tendering of new generation). Date achieved 12/29/ /31/ /31/2012 (incl. % Achieved. Indicator 4 : Planning finalized for EdL to be restructured. quantitative or Qualitative) No complete planning. Planning finalized The steps to be followed for EdL restructuring have been developed. Date achieved 12/29/ /31/ /31/2012 (incl. % Achieved. (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : (quantitative or Qualitative) Original Target s (from Baseline approval documents) Fuel source strategy formulated and approved. No fuel strategy. Fuel source strategy formulated and approved. Formally Revised Target s Date achieved 03/19/ /30/ /31/2012 (incl. % Achieved. Actual Achieved at Completion or Target Years Fuel strategy prepared and used to determine the type of fuel and generation mix of generation projects under development (including LNG development). 7

9 Indicator Indicator 2 : (quantitative or Qualitative) Baseline Original Target s (from approval documents) Formally Revised Target s Actual Achieved at Completion or Target Years National energy strategy integrating the power sector least cost plan, the tariff study, and the fuel sourcing strategy has been prepared and is under implementation. MoEW's PPES represents a national energy strategy. In addition, All of the above not All of the above master plans, tariff prepared prepared. studies have been developed, and fuel sourcing strategy is in pre-development (LNG). Date achieved 03/19/ /30/ /31/2012 (incl. % Achieved. Indicator 3 : Reduction of the financial gap in distribution. (quantitative or Qualitative) 0% 100% Distribution service providers' (DSP) contracts (private sector management contracts) are currently being implemented, and should reduce the financial gap in distribution. However, it is too early to have quantitative evidence supporting this. Date achieved 03/19/ /30/ /31/2012 (incl. % Partially achieved. Indicator 4 : Government decision to proceed with LNG development in the context of a broad fuel supply strategy. Strategy and 2010 PPES included that decision to decision. In addition, (quantitative No strategy in place. proceed with LNG consultant LNG study or Qualitative) in place. successfully completed. Date achieved 12/29/ /31/ /31/2012 (incl. % Achieved. 8

10 Indicator Indicator 5 : (quantitative or Qualitative) Baseline Original Target s (from approval documents) Formally Revised Target s Actual Achieved at Completion or Target Years Individual consultants hired to support implementation of Government's Policy Paper for the Electricity Sector. Team of Consultants were hired consultants in No consultants to support (and are still being hired) place in MOEW to GoL PPES. to support support GoL implementation of PPES. PPES. Date achieved 12/29/ /31/ /31/2012 (incl. % Achieved. Indicator 6 : Progress in implementation of key investments under the Government's Policy Paper for the Electricity Sector. Progress in Progress in key No progress in implementation of investments (e.g. in implementation of key (quantitative key investments distribution and investments under the or Qualitative) under the GoL generation) of the 2010 GoL PPES. PPES. PPES is underway. Date achieved 12/29/ /31/ /31/2012 (incl. % Achieved. Indicator 7 : Detailed organization chart, governance scheme, job descriptions and staff mapping, internal procedures and initial business plan for created entities designed. (quantitative or Qualitative) None of the above are fully designed. All of the above are designed. Some of the above are included in the Booz & Co study. Date achieved 03/19/ /30/ /31/2012 (incl. % Partially achieved. Indicator 8 : Asset register completed and level of capitalization of the new companies and shareholding structure proposed. (quantitative or Qualitative) No asset register and no level of capitalization proposed. Asset register and level of capitalization proposed. Date achieved 03/19/ /30/ /31/2012 (incl. % Partially achieved. Following the approval of the 2010 PPES, distribution has been handed over to DSPs, who are supposed to develop asset registers and inventory controls under their contracts. 9

11 Indicator Baseline Original Target s (from approval documents) Formally Revised Target s Actual Achieved at Completion or Target Years Indicator 9 : Roadmap for corporatization/restructuring of EdL finalized. Roadmap finalized (see Roadmap (quantitative Partial Roadmap exists. second EdL finalized. or Qualitative) corporatization study). Date achieved 12/29/ /31/2012 (incl. % Achieved. Indicator 10 : Cabinet approval of corporatization/restructuring roadmap and allocation of required resources. Cabinet approval No cabinet approval and No cabinet approval and (quantitative and resources no resources allocated. no resources allocated. or Qualitative) allocated. Date achieved 12/29/ /31/ /31/2012 (incl. % Not achieved. Indicator 11 : Efficiency improvement plan developed for each power plant and implementation initiated. (quantitative or Qualitative) No efficiency improvement plans in place. Each power plant has its efficiency improvement plan. Date achieved 03/19/ /30/ /31/2012 (incl. % Achieved. An improvement plan for Deir Ammar and Zaharani is being implemented by YTL (the current O&M contractor). Zouk and Jieh will have their improvements as part of the rehabilitation works that are currently being tendered by the MOEW and CDR. 10

12 Indicator Indicator 12 : (quantitative or Qualitative) Original Target s (from Baseline approval documents) EdL procurement functions reorganized. EdL procurement functions are inefficient. EdL procurement functions reorganized. Formally Revised Target s Actual Achieved at Completion or Target Years EdL works through the Government Tender Board, and major procurement is now transferred to a pool of technical experts within the MOEW, who has consulted the Bank on its major procurement and included recommendations received. Date achieved 03/19/ /30/ /31/2012 (incl. % Achieved. Indicator 13 : Identify priority actions to improve reliability and reduce T&D losses and nontechnical losses. (quantitative or Qualitative) No priority actions identified to reduce losses. Priority actions identified to reduce losses. Three DSPs' contracts are currently being implemented and those should diminish the distribution losses. In addition, the MOEW is conducting 4 bids to build transmission lines and substations, and work is ongoing on closing the 220 kv loop. Date achieved 03/19/ /30/ /31/2012 (incl. % Achieved. Indicator 14 : Finalization of key ongoing projects, including Saida and Baalbek substations, national dispatch center, and the 220 kv network. The control center has been completed, Saida Key ongoing projects not Key ongoing (quantitative and Baalbek substations finalized. projects finalized. or Qualitative) are not done and the 220 kv loop is still not closed. Date achieved 03/19/ /30/ /31/2012 (incl. % Partially achieved. 11

13 Indicator Original Target s (from Baseline approval documents) Asset register and inventory control finalized. Formally Revised Target s Indicator 15 : Asset register and No asset control or (quantitative inventory control inventory. or Qualitative) finalized. Date achieved 03/19/ /30/ /31/2012 (incl. % Partially achieved. Indicator 16 : (quantitative or Qualitative) Auditable financial statements for overdue years produced. Auditable financial statements overdue. Auditable financial statements up to date produced. Actual Achieved at Completion or Target Years On-going under DSPs' contracts under implementation. Audits are complete to 2008 and an auditor is currently being hired to finalize audits for 2009, 2010 and 2011 (financial statements are ready). Date achieved 03/19/ /30/ /31/2012 (incl. % Achieved. Indicator 17 : Detailed EdL financial forecasting produced. Detailed EdL No EdL financial financial Yearly forecasting is (quantitative forecasting. forecasting produced yearly. or Qualitative) produced. Date achieved 03/19/ /30/ /31/2012 (incl. % Achieved. Indicator 18 : Proposed IPPs evaluated and, if viable, bid documentation prepared. (quantitative or Qualitative) No IPPs evaluated. IPPs evaluated. Date achieved 12/29/ /31/2012 (incl. % Partially achieved Kuwaiti fund is to confirm in the very short term its financial support for a consultant to complete a master plan and siting study for all IPPs. MOEW is ready to launch tender to select the consultant. 12

14 G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 06/29/2007 Satisfactory Satisfactory /27/2007 Satisfactory Satisfactory /06/2008 Satisfactory Satisfactory /10/2008 Moderately Satisfactory Satisfactory /20/2009 Moderately Unsatisfactory Moderately Satisfactory /22/2009 Moderately Unsatisfactory Moderately Satisfactory /03/2010 Moderately Unsatisfactory Moderately Satisfactory /23/2010 Unsatisfactory Moderately Unsatisfactory /13/2011 Unsatisfactory Moderately Unsatisfactory /26/2011 Moderately Unsatisfactory Moderately Satisfactory /18/2012 Moderately Satisfactory Moderately Satisfactory 4.14 H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO IP Amount Disbursed at Restructuring in USD millions Reason for Restructuring & Key Changes Made 06/20/2009 No MU MS 2.68 Six months extension. 12/22/2009 No MU MS 3.20 Six months extension. 12/29/2010 No U MU 3.42 Termination of one service contract and reallocation of funds to new activities, clarification of results framework, and 2 years extension. 13

15 I. Disbursement Profile 14

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17 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. In 2006, during the preparation of this project, the Lebanese electricity sector had not been able to resume sustainable reliable and affordable electricity services throughout Lebanon since the end of the civil war. Lebanon s electricity sector suffered from years of overall poor governance, weak institutional, management and technical capacity, and a serious lack of investment in operation and maintenance as well as in new infrastructure. This had led to poor quality of service, low consumer confidence in public service provision, high cost of electricity and inadequate cost-recovery. 2. The main consequences were a considerable dependence of the sector on budgetary subsidies estimated by the Ministry of Finance at close to US$1 billion in In addition, there were high additional costs borne by users through private generators to compensate for the unreliability of power supply. 3. The main outstanding issues in 2007 can be grouped as follows: a. The cost of electricity generation was high because of lack of access to natural gas for power generation. In addition, plant efficiency was below normal levels due to poor maintenance, poor control of fuel stocks and consumption, and an ad hoc dispatch to meet demand. b. The reliability of supply was poor. The available generation capacity was significantly below the demand and the transmission network was fraught with inefficiencies. The main 220kV backbone grid was not fully completed, nor was the long-planned national load control center in place. Major investments were also required in the medium- and low-voltage transmission and distribution (T&D) systems, as well as in metering to account for and ultimately reduce T&D losses. c. Metering, billing and collection were highly inefficient. Technical losses were estimated at about 15%, and commercial losses from illegal connections were estimated at 18%. In reality, out of the 67% of the power produced that EdL managed to bill for, about 90% on average was eventually collected annually. d. EdL s management systems were outdated and ineffective. Accounting and financial reporting systems were not functioning adequately and did not allow the annual closing of EdL s account or their auditing. The consumer management system was not reliable while the human resources management system was also ineffective. 4. Aiming to solve all these challenges, an Electricity Law (Law 462) was passed in This Law laid out the restructuring of EdL, and called for the creation of a regulatory authority, unbundling of all or parts of the sector, incorporation of the new entities under commercial law, and, ultimately, privatization of up to 40% of the shares. Since the Law was enacted, several attempts were made to advance its implementation, but as of 2006, there had been no change to the structure or status of EdL. In addition, for the law to be effective, some decrees needed to be approved. 15

18 5. On July 6, 2006 the Council of Ministers approved a reform program aimed at addressing the most critical problems and achieving the quickest improvements possible. The ultimate objective was to turn the sector around through private sector participation, in accordance with Law 462. While there was recognition that full privatization would be difficult within the context of significant dependence of the sector on large subsidies and the political economy of reforms, several steps were proposed to commence the turnaround of the sector, including restructuring and incorporation under commercial law and outsourcing to the private sector of key functions. 6. However, when the July-August 2006 Israeli war broke out, the electricity sector reform program was put aside as more urgent priorities took over. The hostilities resulted in serious human and physical infrastructure losses in Lebanon. The direct damage was estimated by the World Bank (WB) at about US$2.4 billion with a further US$700-$800 million of indirect damage. 7. In September 2006, the Bank s Board of Governors had approved a transfer of US$ 70 million from IBRD surplus to a Trust Fund for Lebanon (TFL) (Resolution 580) to support the GoL s reconstruction efforts. Bank support was to be centered on priority areas where the Bank had a distinct comparative advantage, namely the rehabilitation of damaged infrastructure, support to groups affected by the hostilities and jump-starting of economic activities. The Bank s short-term emergency response to the post-hostility needs centered on undertaking an economic and social impact assessment (ESIA) which outlined key reform elements necessary for transitioning from short-term reconstruction to sustainable growth. This ESIA included a comprehensive chapter on the electricity sector. 8. The political situation in Lebanon continued to be tense during appraisal. The opposition block was calling for greater representation in the Government and the Speaker of the House declined to convene the Parliament. Six Cabinet Ministers resigned in November 2006 (including the energy one) and the demonstrations by the opposition in front of Government headquarters paralyzed parts of Beirut for months. Therefore, the political climate early 2007 was challenging as the ambitious reform agenda was envisaged by Paris III was being prepared. This led to a lack of consensus to move forward the reform agenda, especially in the electricity sector. 9. At the Paris III Conference held in January 2007, the international community was presented with the Government of Lebanon s (GoL) comprehensive and ambitious reform program and asked to provide its financial support. The substantial aid pledged to Lebanon (over US$ 7.6 billion) had a substantial emphasis on the power sector which attested to its important contribution to the country s sustainable reconstruction and economic recovery program. 10. A Country Assistance Strategy (CAS) for was discussed by the Board on December 2005, and was structured around the following pillars: (i) governance for economic management and growth support; (ii) the development of human capital and the mitigation of the poverty effects of transition; and (iii) resource and environmental 16

19 management. During the preparation of this project, an Interim Strategy Note (ISN) was being prepared to reflect on the significant changes in the underlying Lebanese context This ISN was anchored in the Government s medium-term reform program presented at Paris III and around the same three pillars that characterized the previous CAS. The ISN was endorsed by the Board before the effectiveness date of this project in July In parallel to the preparation of this project, a reform implementation development policy loan (DPL) was under preparation, and this grant was seen as a first step paving the way for the DPL s ambitious objectives of reform. The DPL would in turn help provide the policy environment under which substantial funds from other donors would contribute to the significant investment and institutional needs in the electricity sector. This DPL was eventually approved by the Board in August Original Project Development Objectives (PDO) and Key Indicators 12. The development objective of the project was to accelerate the implementation of reforms and restructuring of EdL by enhancing the capacity of Ministry of Energy and Water (MOEW), EdL and the multi-ministry higher level committee (MMHLC). 13. As defined in the Grant Agreement, the MMHLC shall be composed of inter alia: (i) the Prime Minister; (ii) the Minister for Finance; (iii) the Minister for Energy and Water; (iv) the Secretary-General of the Higher Council for Privatization (HCP); (v) the Director-General of EdL; and (vi) the President of the Council for Development and Reconstruction (CDR). The MMHLC was to be responsible for overall project oversight and coordination. 14. The World Bank proposed to focus on three key project outcome indicators: (i) the start of implementation of cost reduction projects; (ii) EdL restructuring and better management, as well as a more skilled staff base resulting in efficiency and productivity gains; and (iii) the injection of capacity in EdL so that cost reduction projects would be implemented and reliability of supply improved. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 15. The PDO remained the same throughout the project lifespan. The original 3 project outcome indicators were replaced by 4 modified indicators after restructuring. The rationale behind these modifications was to clarify and make more measurable the original indicators, as well as to adapt the results framework to the changed implementation plan proposed in the restructuring paper. Furthermore, some of the intermediate outcome indicators changed during project restructuring. 1.4 Main Beneficiaries 16. While the implementing agency or contracting authority was the CDR, the beneficiaries of the grant were the MOEW, EdL and the HCP. Indirectly, all the 17

20 Lebanese population was to benefit from a reformed EdL which is more capable of achieving its mission. 1.5 Original Components 17. The achievement of the project outcomes was to be supported through the following three components: (i) Provide support to strengthen the capacity of the MOEW to implement power sector policy reform The service contract under this component included policy advice on key sector strategic issues, on the completion of on-going projects, and on the establishment of a regulatory agency. (ii) Provide support to the Government of Lebanon for the restructuring of EdL The service contract envisaged under this component included advising the GoL on the restructuring strategy of EdL and the companies to be created, as well as developing an asset register and proposing a level of capitalization of the new companies. (iii)provide support to EdL to improve the operational and financial performance and the implementation of its restructuring The service contract under this component was meant to address: generation efficiency and procurement, T&D reliability and efficiency, commercial issues, and financial issues and accounting. 1.6 Revised Components 18. The project components remained the same throughout the project lifespan. 1.7 Other significant changes 19. In June 2009, following a request from the GoL, the closing date of the project was extended by 6 months from June 30, 2009 to December 31, The rationale was that the two service contracts of components (i) and (iii) were signed in September 2007 for a duration of 24 months, and more time was needed to ensure the adequate completion of these two contracts. 20. In December 2009, following another request from the GoL, the closing date was extended by another year until December 31, The goal of this extension was to allow the service contract of component (iii) to be finalized. This contract consisted of two phases. Only the reports for phase one had been delivered in August 2008 and were still awaiting GoL approval. 21. The project was restructured in December The goal of this restructuring was to reflect the fact that the original service contract of component (iii) was being terminated, and that the remaining US$ 1.8 million were being reallocated to: (i) support the development of a roadmap for corporatization; (ii) a study on the potential of liquefied natural gas for Lebanon; and (iii) hiring individual experts to support the 18

21 MOEW in implementing its Policy Paper for the Electricity Sector (PPES). In addition, this restructuring was used to clarify the original results framework. The closing date of the project was extended by 2 years to December 31, 2012 to allow for the adequate implementation of the above activities, and thus the achievement of the project s development objective. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 22. There was a clear rationale for the Bank s intervention under this project and it was in line with the GoL s priorities, both because of the heavy burden of the sector on the GoL s budget, and because of the need to fund other post-war priority reconstruction efforts. This intervention was part of the wider Paris III roadmap agreed between the GoL and the donor community. In addition, the preparation of this operation was subject to the high time pressure characteristic of any emergency recovery grant intervention. 23. The difficulty of implementing sector reform projects in Lebanon based on previous experiences was duly acknowledged during project preparation. Broader lessons learned from Bank s experience in implementing projects in post-conflict countries were collected. These included (i) having a flexible and very concrete project design to allow for adaptation to changing circumstances; (ii) unbundling carefully and limit as much as possible the number of unbundled entities; (iii) be ready to make adjustments midstream. 24. The project benefited from a co-financing of US$ 973,000 from the French Development Agency (AFD) for component (iii), which allowed for the service contract giving support to improve EdL s financial and operational performance to cover a wider scope of activities. 25. Shortcomings at project appraisal included: The project design either overestimated the existing level of political consensus around the way EdL should be restructured, or assumed that the reform implementation DPL would achieve that consensus. Despite acknowledging that the fluid political environment was a risk, the project assumed that the consensus around the 2002 Electricity Law was wide, which was later on seen to be a missappreciation 2. Assigning the supervision of the restructuring of EdL directly to the HCP. 26. The above-mentioned shortcomings are considered moderate and do not make the project objective or design inconsistent with the GoL and the Bank s continuing development priorities in Lebanon. 2 The opposition block was calling for greater representation in the GoL and the Speaker of the House declined to convene the Parliament. Six Cabinet Ministers (including the Minister of Energy) resigned in November 2006 and the demonstrations by the opposition in front of the GoL headquarters paralyzed Beirut for months. 19

22 2.2 Implementation 27. The political situation in Lebanon throughout project implementation was fragile. Presidential elections that were due in the fall of 2007 were not held until May As a result, a new interim government was formed, with its main mandate to prepare new parliamentary elections in June Subsequently the new government that was formed in November of that year remained in power until January Finally, a new government took office in June 2011 and remained in place until the end of this project. 28. The MMHLC was established to provide support to the energy reform process, to which the Bank was contributing through this project and through the reform implementation DPL. However, due mainly to lack of political agreement on restructuring and corporatization of EdL, the MMHLC never reconvened after 2007, which did not facilitate the much needed consensus building. 29. The lack of consensus on EdL s reform as defined in the electricity Law 462 across the GoL was evident when the consultant of component (ii) delivered its first report in 2008, as the GoL was not able to approve the recommendations given by the consultant, and was also unable to formulate a way forward based on consensus. Eventually, the consultant s contract was cancelled early The project s restructuring in late 2010 helped achieve the PDO and contributed to the full utilization of funds 3. The restructuring was balanced as, while respecting the original PDO, introduced pragmatic and achievable outcome indicators reflecting the changes in activities, which facilitated getting the project back on track. A minor shortcoming was that many of the intermediate indicators related to EdL s corporatization could have been dropped at the restructuring stage as it was clear at that point that it would not happen over the lifespan of the project. 31. Another factor that contributed to the overall success of the project was having the Task Team Leader (TTL) based in Lebanon from 2010 onward. This contributed to assist the GoL to take a decision on how to recommit the unused funds from the component (ii) service contract, and to ensure the smooth implementation of these new activities. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 32. The PDO of the project was weakly defined, including an explanation of how the objective was to be met by using the word by (as a synonym of means of ). This additive should not be part of an objective as it refers to the means by which the objective is to be met. This matter is further complicated as this by statement was not fully picked up as part of the outcome indicators, leaving considerable uncertainty about how they are to be measured. 3 The key elements of the restructuring are described in section 1.7 above. 20

23 33. The outcome and intermediate indicators were overall clear, and their progress was adequately reported in the implementation and status reports. However, many of the original indicators were difficult to be measured. In addition, the number of intermediate indicators was arguably more than what is needed for a technical assistance of this size and characteristics, and the direct link with the components of this project was not always solid. 2.4 Safeguard and Fiduciary Compliance 34. The project complied with the Bank s financial management (FM) procedures and requirements. It submitted interim un-audited financial reports to the Bank on time. All implementation and status reports (ISR) have consistently rated FM as satisfactory, audit reports were submitted, with unqualified auditor s opinion acceptable to the Bank. Two key factors helped improve the project s FM practices include: (i) the competency of the finance unit at CDR; (ii) the introduction of e-disbursement in May 2010, which enabled and speeded up the delivery of electronic withdrawal applications through Bank s client connection. In June 2010 the Bank conducted several workshops and training events on the use of the e-disbursement facility in Beirut. The utilization of the new facility improved processing of withdrawal applications, achieved faster turnaround time, reduced transaction costs, and improved the Borrowers management of flow of funds. 35. The procurement was adequately handled by CDR, who showed to have a solid experience with WB procurement guidelines. In addition, the reactions of the market to the expression of interest were satisfactory, ensuring a high likelihood of a good value for money of the five studies financed by the project. 36. As of December 31, 2012, the project had disbursed over 99.98% of the US$ 5 million grant proceeds. 37. An assessment of safeguards compliance is not relevant for this project. This was a category C project and no safeguard policies were triggered, given that the project was a technical assistance. 2.5 Post-completion Operation/Next Phase 38. This project will have a real impact if the recommendations developed under the project to facilitate the reform process of EdL are used and the reform process is sustained in the medium term. This is likely to be the case for a number of recommendations that are part of the 2010 PPES currently under implementation. An urgent follow-up step for EdL is for the Council of Ministers to approve the restructuring road map under component (ii) and to provide the necessary budget to start its implementation. 39. A dialogue is underway on potential WB and other donors financing of some of the reform program investments under the PPES. More specifically, discussions are underway for the WB to give support to the GoL in the development of a liquefied 21

24 natural gas (LNG) re-gasification facility by potentially providing a partial risk guarantee (PRG). This initiative is a result of the Lebanese fuel source strategy presented in the PPES. Therefore, the origin of this activity can be partially attributed to the success of this project and its recommendations. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Rating: Substantial 40. The project objective s relevance to the situation of Lebanon today is high. The Policy Statement and Budget Law of 2010 identified electricity as one of the priority focus area in which reform and investment actions would produce tangible results, and thus engagement in the sector is still highly relevant. In addition, Cabinet approved in June 2010 the PPES to reform the power sector in order to provide continuous and costeffective electric power to all citizens and productive sectors. The Country Partnership Strategy ( ) for Lebanon includes electricity as an explicit priority in one of its four strategic goals (economic infrastructure). In addition, two other of these goals are related to consequences of the dysfunctional electricity sector, the difficulties to achieve fiscal sustainability, as well as the challenges to have a competitive business environment having such a deficient public power system. 41. The design and implementation of the project have shown to be substantially relevant. The three components were an adequate comprehensive support to the MOEW in the implementation of necessary sector reforms, a technical assistance on how to restructure EdL, and a support to EdL to improve its operational and operational performance. A moderate shortcoming was that the MMHLC did not supervise the implementation of the second component as designed (restructuring of EdL). This was due to the fact that, since the MMHLC never reconvened after 2007, the consultancy study of component (ii) on the restructuring of EdL was exclusively led by the HCP. In addition, at a later stage, a second study on the same topic was lead exclusively by the MOEW. The main difference between these two studies is that while the former proposed to quickly transit into unbundling of EdL, the latter recommended having a smoother transition towards corporatization. 42. Based on a highly relevant objective, and substantially relevant design and implementation, the relevance of the objective, design and implementation of the project is rated as substantial. 3.2 Achievement of Project Development Objectives Rating: Moderately Satisfactory 43. As a technical assistance, this project delivered 5 studies which contributed to achieve the projects outcome as well as the PDO indicators. The 5 studies and the project components outputs are summarized here and further described in Annex 2: 22

25 Component 1: a. Strengthening the capacity of the MOEW to implement power sector policy reforms (from November 2007 to September 2009) b. The LNG solution for Lebanon (from October 2011 to April 2012) Component 2: c. Advisory support to restructure and corporatize EdL (started in November 2007 and terminated early 2011). d. Assistance for the corporatization of EdL (from February to June 2012) Component 3: e. Financial and Engineering Support Services to EdL (September 2007 to April 2009) 44. This ICR does not evaluate separately the achievements before and after the 2010 restructuring because the PDO remained unchanged. While some of the outcome indicators changed, this ICR understand this was done with the purpose of clarifying the indicators and making them and more measurable. The table below shows that at the time of restructuring, the original three outcome indicators had not been achieved. After restructuring, however, the performance improved, and three indicators were fully achieved and one partially achieved. Achievement of outcome indicators Outcome indicators Project component Achievement Pre-restructuring 1. Cost reduction projects start being implemented. 1 No* 2. EdL is restructured and is better managed and comprises a more 2 No* skilled staff base resulting in efficiency and productivity gains. 3. Capacity is injected in EdL so that cost reduction projects get 3 No* implemented and reliability of supply better supplied. Post-restructuring 4. Final decision to proceed with development of alternate fuel supply (LNG) in the context of a broad fuel supply strategy. 1 Yes 5. Progress in implementation of policy directions outlined in the 1/3 Yes Government of Lebanon's Policy Paper for the Electricity Sector (PPES). 6. Planning finalized for EdL to be restructured 2 Yes 7. Roadmap for EdL restructuring/corporatization finalized and agreed across Government. 2 Partially * These indicators are evaluated at the time they were revised or dropped (that is December 2010) 45. For evaluation purposes, the PDO of this project is disaggregated in the following two parts: (i) Accelerate the implementation of reforms (project component 1) (ii) Accelerate the restructuring of EdL (project components 2 and 3) 46. The first part of the PDO has been satisfactorily achieved because of the following: A key success of this project has been to provide comprehensive inputs into the 2010 PPES prepared by the MOEW and approved by the Council of Ministers. Indeed many of the ten strategic initiatives put forward in the PPES directly 23

26 emanate from the reports produced under the consultancy service contract of assisting the MOEW of component (1), including, for example, the increase in generation and transmission capacity addressed in law 181/2011 (approved in October 2011). Broad and significant progress has taken place on the implementation of the 2010 PPES, including: (i) re-gasification plant to import LNG under tendering process; (ii) distribution service providers contracts ongoing; (iii) improvement plan for Deir Ammar and Zahrani under implementation; (iv) improvement rehabilitation plans for Zouk and Jieh under tendering process. As stated in the PPES of 2010, a prefeasibility study to construct a LNG marine terminal has been completed. The tender for the project has started by issuing the request for expressions of interest in March 2012, and the request for proposals is scheduled to be issued early summer Since the cost of fuel represents at least two-thirds of the total electricity cost, switching to gas will bring clear cost reductions. 47. Project achievements corresponding to the second part of the PDO include: Following the 2010 PPES, the management of the distribution business of EdL has been turned-over to three distribution service providers under management contracts. Some progress has been made in terms of EdL management procedures, such as updated financial audits reporting, financial forecasting, or generation of key performance indicators. A roadmap for EdL restructuring has been finalized (see second study of component 2). 48. Some shortcomings in the achievement of the second part of the PDO include: The EdL roadmap restructuring has not been approved yet by the Council of Ministers - it is currently with the MOEW who needs to seek approval. Despite restructuring having initiated, it is still not clear if and when EdL would be corporatized. 49. Based on the satisfactory achievement of one part of the PDO and moderately satisfactory achievement of the other part, the overall achievement of the project objective is rated as moderately satisfactory. 3.3 Efficiency Rating: Moderately Satisfactory 50. No explicit economic or financial analysis was conducted during project preparation, which is understandable given the technical assistance nature of the project. Instead, some of the potential economic and fiscal impacts that could emanate from this technical assistance were enumerated. The economic impacts identified at appraisal included: reduction of sector investment needs and the long-term cost, lower consumption of production factors, reduction of the utilization of non-economical individual power generators, reduction of economic production lost, and reduction of 24

27 power thefts. The fiscal benefits of the reforms were to be measured in terms of reduced need for Government subsidies. 51. Some of the economic impacts identified at appraisal have been or are in the process of being harnessed. These include, for example: lower generation costs with LNG estimated at US$ 200 million per year savings, benefits from the rehabilitation of Zouk and Jieh estimated at US$ 30 million per year savings, or likely reduction of losses through the DSPs contracts implementations. 52. However, as can be seen in the graph below, the fiscal burden of EdL on the GoL budget has not diminished since Following very closely the price of crude oil, it has gone from representing 3.9% of Lebanon GDP in 2007 (US$ 1 billion) to 5.4% (expected) in 2012 (more than US$ 2 billion).while this result is not satisfactory, it may have been unrealistic to establish clear causality links between this technical assistance project and a reduction in the fiscal burden of EdL for the GoL Transfers to EDL (LL Billion) Crude Oil Price (US$) Source: Ministry of Finance, Government of Lebanon 53. Since this project was a technical assistance, another way to assess its efficiency is to look at the quality of the procurement process of its five service contracts. The table below summarizes the available data on these procurement processes: Number Expressions of Interest submitted of which led by International firm Number proposals received % proposals that passed technical threshold 1 st technical option selected 1 st EdL corporatization study Support to MOEW capacity Support to EdL 2 nd EdL corporatization study LNG study % 84% 92% 66% 100% % 75% 50% 100% 100% No (2 nd ) Yes Yes Yes Yes 25

28 54. The above procurements were competitive for the following reasons: (i) the number of expressions of interest (EoI) were between middle-high and high, (ii) there were international firms interested in the contracts (which means that the advertisement was well done, and that there was an interest in that type of contract), (iii) in most cases the 1 st technical option selected was the final option (which is positive from the GoL s perspective), and (iv) many firms from the shortlist passed the technical minimum (which is a signal of quality as, according to WB procurement rules, a maximum of 2 firms from the same country can be put in a shortlists). 55. A moderate shortcoming is that it would have been more efficient to have only one service contract looking at the restructuring possibilities of EdL. Some inefficiency arose from obvious thematic overlapping. However, the two studies approached the restructuring challenge form different perspectives, and were supervised differently, and recommended different speeds of transition towards EdL corporatization. 56. Given that important economic benefits of the project are very likely to be realized, that the procurement of all studies of this technical assistance project were efficient, but that two studies partially overlapped thematically, the efficiency of the project is rated as moderately satisfactory. 3.4 Justification of Overall Outcome Rating 57. The project is overall rated moderately satisfactory as a result of combining the ratings of its relevance, achievements, and efficiency, which are rated either substantial or moderately satisfactory. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 58. Despite the evident impacts that a better functioning electricity sector would have on social development and poverty reduction, there are no specific impacts for this section that have not already been mentioned in other parts of the document. With respect to gender issues, they were neither assessed at project appraisal nor in the ICR because the design of the project is considered to be gender-neutral. (b) Institutional Change/Strengthening 59. Some of the consultants hired by the MOEW following discussions under this project have brought much needed specific technical expertise and have remained in the MOEW even after this project s closure. These consultants are for example currently working on an update to the 2010 PPES and the derived benefits with the latest information about the projects that have been implemented or under implementation. This new study will have a base year 2012 and it will forecast a short term study up to 2015 and a long term study up to Hence the impact on long-term capacity and institutional development of the MOEW has been significant. 26

29 (c) Other Unintended Outcomes and Impacts 60. The analytical evidence and modeling that has allowed quantifying some of the simulated benefits of the 2010 PPES has been particularly rigorous. As a result, some of the MOEW consultants have published an article in a renowned academic peer-reviewed journal (Energy Policy) called A simulation model for reliability-based appraisal of an energy policy: the case of Lebanon. 4. Assessment of Risk to Development Outcome Rating: Significant 61. While the likelihood that the capital investments outlined in the PPES does not materialize is moderate, the likelihood that some of the necessary reforms do not take place is significant (e.g. tariff restructuring). This could have a significant negative impact on the sector, as it would strongly undermine the sustainability of the planned investments as well as of the overall sector. In addition, while the continuing implementation of the DSP contracts is not in danger, the follow-up once the two years implementation period is over is an area of risk as well. 62. The likelihood that the proposed roadmap for restructuring of EdL is not endorsed anytime soon by the Council of Ministers is significant. While the MOEW technical staff has been involved in the process, it could be the case that a political consensus is hard to reach. In addition, sectarian interests and political instability could also be a challenge to this endorsement and to the implementation of EdL s restructuring 4. The impact of not reaching a political consensus would be again significant, as the momentum and tools provided by this project for EdL s restructuring would be lost and become quickly outdated. 63. Given the inherently political nature of the above and the difficulty to have clear mitigation measures against them, the risk to development outcome is deemed to be significant. 4 The Lebanese President accepted the resignation of Prime Minister Mikati as recently as March 23, 2013, who had been in office since June

30 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 64. The Bank s performance during project preparation was overall satisfactory: the rationale for the project was clear, its goals were in line with the GoL s priorities defined in the framework of the Paris III conference, there was a commitment from the different branches of the GoL to the PDO, and this technical assistance was aimed at laying the ground for the reform DPL approved a few months later in The Bank decided to take a calculated risk believing there was a window of opportunity for reform. Despite the fact that defining project outcomes of technical assistances is challenging, the PDO of the project was potentially too wide and overestimated the real level of political consensus around how to restructure EdL or assumed that the parallel reform implementation DPL would achieve that consensus. 66. In addition, a deep analysis of the political economy around the power sector in Lebanon would have helped to understand and ensure the buy-in of the reform by a critical mass of key stakeholders. Part of these shortcomings was presumably due to tight time constraints given that this was an emergency grant. 67. Since the above shortcomings are considered to be moderate, the WB performance during identification, preparation and appraisal of the project is rated moderately satisfactory. (b) Quality of Supervision Rating: Satisfactory 68. The WB team performed well during project supervision: (i) the team s composition during missions was balanced; (ii) reporting by Aide Memoires and Implementation Status Report was done regularly; (iii) the team reacted timely when the approval of the first EdL restructuring contract report was delayed and pushed for alternative solutions to accelerate the lagging disbursements, managing to put the project back on track; (iv) the restructuring of the project successfully managed to inverse the previous negative performance tendency; (v) a fluid dialogue with the GoL accompanied the full lifespan of the project, particularly in supporting the implementation of the PPES after the restructuring; and (vi) the TTL of the project was based in Beirut since Some shortcomings included: (i) the results framework intermediate indicators were not consistently tracked before the 2010 restructuring; (ii) the number of intermediate indicators could have been reduced during the project restructuring. Since these shortcomings are considered as minor, the Bank s supervision quality is rated as satisfactory. 28

31 (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory 70. The ICR rates the overall performance of the WB as moderately satisfactory. In line with the harmonized criteria for ICR and IEG evaluations, the rating of overall WB performance is based on the ratings for each of the two dimensions which are one rated moderately satisfactory (WB performance in ensuring quality at entry) and the other one satisfactory (WB quality of supervision). 5.2 Borrower Performance This ICR considers the CDR to be the implementing agency, and the MOEW, HCP, and EdL are all considered as parts of the Government 5. (a) Government Performance Rating: Moderately Satisfactory 71. The GoL showed its commitment to improve the sector in 2010 with the PPES approval by the Council of Ministers, building significantly on the outputs generated by the service contract supporting the MOEW. In addition, the GoL has started implementing several of the activities included in the PPES. The supervision by the different parts of the GoL of the five service contracts was generally satisfactory. 72. However, the following moderate shortcomings were noticed: (i) it took the GoL two years and a half to terminate the first EdL restructuring contract since the report was presented in 2008, due to divergences of views on the speed at which reform of EdL should take place. However, this delay was partly due to a change in Minister 6, with the new Minister taking the necessary time required to understand the sector and develop a Policy Paper to address sector issues, before then requesting a restructuring to improve the Project's performance in line with the policies that had been decided upon; (ii) the level of consultations and inclusiveness of the part of the GoL leading both EdL restructuring studies were suboptimal, complicating a consensus around the final outputs of consultants; (iii) EdL s approval and feedback to its consultant s reports was considerably slower than what is best practice, creating delays in payments that produced understandable tensions from the consultant. 73. Given the above mentioned moderate shortcomings, the Government s performance is rated moderately satisfactory. (b) Implementing Agency Performance Rating: Satisfactory 5 This is in accordance with Article II of the Trust Fund for Lebanon Grant Agreement. 6 The MOEW was under the leadership of the same Minister under the last two GoL administrations. 29

32 74. The management of CDR worked diligently to ensure that implementation proceeded on schedule given the work environment, fulfilling its fiduciary functions specified in the Grant Agreement. In addition, when different branches of the GoL had diverging opinions, it somehow managed to play a catalyzing role in inducing consensus and in unblocking overdue payments to consultants. 75. Since the shortcomings of the CDR performance were only minor, the implementing agency performance is rated satisfactory. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 76. The ICR rates the overall performance of the Borrower as moderately satisfactory. In line with the harmonized criteria for ICR and IEG evaluations, and considering that one dimension is in the unsatisfactory range while the rating for the other dimension is in the satisfactory range, the rating of the overall borrower performance depends on the outcome rating. The moderately satisfactory rating is given because the outcome is in the satisfactory range. 6. Lessons Learned 77. The Bank s entering strategy into sensitive political topics in complex environments should be carefully scrutinized. While risk taking during project preparation should be encouraged when a window of opportunity is identified, pragmatic and focused project development objectives consistent with the amount of resources involved facilitate achieving a higher impact of the project. For example, while having a real impact in accelerating the reform of EdL with a small financial envelope such as this grant may have been overambitious, contributing to switching the Lebanese power plants into gas is a less controversial objective with a huge rate of return for the sector. 78. Being transparent and earning buy-in from stakeholders on the reform process is essential: if the final industrial structure is not defined ex ante, the restructuring assessment should be inclusive of all stakeholders to succeed. Given the fact that the MMHLC never formally convened after 2007, the first EdL restructuring study was led almost exclusively by the HCP, and the second EdL restructuring study was led almost exclusively by the MOEW, with very little buy-in from other important agencies and players. Both studies have in common the long-term objective, but the short and medium term recommendations differ on the speed at which the sector should be reformed. 79. If one aims at important power sector reforms, having a clear and explicit understanding of the political economy challenges is essential to understand who the winners and losers behind the reform are. This is of paramount importance to create proreform coalitions that can help foster the process and avoid narrow sectarian interests continuing overshadowing national level interests. 30

33 7. on Issues Raised by Borrower/Implementing Agencies 80. were received from the HCP and are gratefully acknowledged by the Bank team. In addition to pointing out a number of minor details and inconsistencies in the document that have been addressed, the comments from the HCP build on the following two issues. 81. First, the HCP argues that this report indicates that neither the first nor the second EdL restructuring contracts were able to achieve consensus among the Lebanese government stakeholders and that a more inclusive approach could have been used to handle both contracts. The HCP disagrees that this was the case for the first of those contracts. While the Bank team acknowledges HCP's efforts to build consensus, and that a certain amount of consensus was reached, the Bank team believes that the fact that the first important output of this first EdL restructuring contract was never approved by all parties shows that there was some level of disagreement on certain aspects. Eventually, this lead to the termination of this contract. 82. Second, the HCP clarifies that it is a ministerial committee headed by the Prime Minister, which members are the Minister of Finance, the Minister of Economy and Trade, the Minister of Labor, the Minister of Justice and the relevant Minister, in this case the Minister of Energy and Water. The Bank team takes note of this information, which does not contradict the fact that the grant agreement of this project required the creation of a multi-ministry higher level committee that never met after This committee was to be composed of inter alia the Prime Minister, the Minister for Finance, the Minister for Energy and Water, the Secretary General of the Higher Council for Privatization, the Director General of EdL, and the President of the Council for Development and Reconstruction. 31

34 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Components Appraisal Estimate (USD millions) Actual/Latest Estimate (USD millions) Percentage of Appraisal Component 1: Support MOEW 2.08 NA Component 2: Support EdL restructuring 1.85 NA Component 3: Support EdL performance 2.19 NA Total Financing Required 6.12 (b) Financing Source of Funds Type of Cofinancing Appraisal Estimate (USD millions) Actual/Latest Estimate Percentage of (USD Appraisal millions) Borrower % Special Financing % AFD NA TOTAL

35 Annex 2. Outputs by Component This Annex presents the main sections and main outputs and recommendations of the five service contracts that have constituted the bulk of the expenses under this contract. Component 1: Provide support to strengthen the capacity of the Ministry of Energy and Water (MOEW) to implement power sector policy reform The services covered under this component included policy advice on key sector strategic issues, complete on-going projects, and the establishment of a regulatory agency. The following two studies fall under this component. i) The Strengthening the Capacity of the Ministry of Energy and Water to implement power sector policy reforms (November 2007 to September 2009) In addition to an Inception and a Final report, the following ten sector reports were produced under this study: 1) Power sector strategy 2) Fuel sourcing strategy 3) Advice on implementation of fuel strategy 4) Natural gas 5) Liquefied Natural Gas 6) Donor coordination 7) CRA projects intended to minimize non-technical losses in distribution 8) IPPs 9) Proposal for establishment of the regulator 10) Tools and procedures to be used by the regulator The following recommendations of further actions were given: Initiate investigations for possible sites for 300 MW reciprocating engines and start its procurement Launch site investigation and detailed studies for a coal fired power plant in Salaata Launch necessary regulatory measures for LNG development, and initiate tender documents for a FSRU Increase tariffs by 20% for 2010 Develop a step-by-step plan for increasing the effectiveness of the transmission system and system operation Initiate immediate activities to reduce non-technical losses Initiate immediate formation of the Electricity Regulatory Agency Resume the Mercados study and choose urgently the final future management model for the Lebanese electricity sector so that restructuring can be assumed as soon as possible so as to support all the other measures stated above. 33

36 ii) The LNG solution for Lebanon (February to June 2012) The Government of Lebanon had already expressed in its 2010 PPES its willingness to purchase Liquefied Natural Gas (LNG) to reduce the large cost burden of burning gasoil in its power plants. For this purpose, a LNG import terminal is being envisaged, and this study was aimed at providing advice to the GoL on how to implement it. The objectives of the study were: to confirm that a long-term supply contract for the volumes required in Lebanon was possible and an indication of the expected price range based on in-depth investigation of the global LNG market and key suppliers; for 3 envisaged sites for the import terminal: provide the optimal design (receiving terminal, storage, regasification, and associated facilities), describe the environmental and social impacts, estimate the costs and lead times, develop analyses of project economics; give advice on legal and regulatory issues and requirements, as well as on feasible project structures and associated project financing options; recommend a site, a project structure, and a LNG purchasing option; confirm that LNG terminal developers and LNG suppliers are interested to participate in the proposed project to deliver regasified natural gas to the GoL and under which conditions. The key findings of the study were: Lebanon will require up to 3.5 MMt per year of LNG demand to meet long-term power generation requirements; An offshore floating storage and regasification unit (FSRU) is the preferred technology for Lebanon LNG imports; Beddawi is the preferred site because of its closeness to existing CCGT plants and relatively sheletered offshore site; Some of the key suppliers that the GoL should approach for procuring LNG are Qatar, Algeria, Egypt, and Yemen. In addition, companies controlling LNG supply from the region are: Qatar Petroleum, Sonatrach (Algeria), GDF Suez (Egypt and Yemen), Total (Yemen and Qatar), and Shell (Qatar). Lebanon will be competing with European and Asian buyers for LNG. It would therefore pay a price between 11 and 14 $/MMBtu to secure LNG at projected oil prices of $ 90 per BBL (or between 13 and 16 at current $ 120 per BBL), which remains at a large discount to premium gasoil currently used in CCGTs. Efficient decision making by the GoL is crucial to advance the project and secure both the LNG supply and the FSRU vessel. This includes having in place all the required regulatory natural gas and LNG import requirements (2002 LNG and natural gas draft law could be a good platform to initiate the process). 34

37 Component 2: Provide support to the Government of Lebanon for the restructuring of EdL The key services envisaged under this component included advising the GoL on the restructuring strategy of EdL and the companies to be created, as well as developing an asset register and proposing a level of capitalization of the new companies. iii) Advisory support to restructure and corporatize Electricité du Liban (started in November 2007 and was terminated early 2011) This project aimed at having the consultant make proposal in the two following areas: 1) Industry structure: how many companies, ownership, management and other key macro-organizational issues. 2) Industry model and instruments: how would the unbundled sector function, where would markets be introduced, which segments would be regulated, and additional process-related issues designed to improve the overall sector efficiency. The report on the first component was delivered to the client in August However, its conclusions did not generate consensus among different parts of the GoL, and the go ahead for the second part of the work was never given to the consultant. Eventually, the contract was cancelled early 2011 and the remaining funds were reallocated to other tasks (i.e. the Booz Allen contract, the Poten & Partners contract, and hiring of some consultants for the MOEW). The first report included a map of sector participants in the Lebanese electricity sector, the rights and obligations of each of the participants, the roles of the GoL and different governmental offices, and a proposed electricity sector / market model structure for Lebanon, including the roles for the public and private sector. Considering that the two main objectives of restructuring EdL were to attract private investment in generation and to improve the operational performance of the whole system, the recommendations made by Mercados in this report were the following: Establish a competition for the market between potential entrants (IPPs) as an interim arrangement in the long term reform process which should aim at competition in the market between generators (i.e. wholesale market competition) Establish a classical Power Purchasing Entity (PPE) independent from EdL generation (which could imply amend law 462 to allow for PPE independency) Keep the Transmission service provider (TSP) and System Operator (SO) unified under EdL Transco Unbundle EdL generation system into 3 business units (the two similar thermal plants of Deir Amar and Zahrani, and the remaining portfolio in another business unit) Unbundle the distribution into 2 companies (Disco North and Disco South) Once EdL is corporatized, ensure it does have a holding structure, with legal separation between the different subsidiaries 35

38 The institutional organization proposed is represented in the following diagram: The industry structure proposed is represented in the following diagram: iv) Assistance for the corporatization of Electricite du Liban (from February to June 2012) The CDR commissioned Booz & Co to develop the required studies for the assessment an planning phase of the corporatization of EdL, which should eventually be followed by the implementation phase. A three-tier approach was chosen. 1) Target industry structure Based on lessons learned from other cases and considering Lebanon s context, five target industry structure options were considered: (i) total vertical integration, (ii) generation (G) and transmission (T) integrated, and several distribution (D) companies created; (iii) T and D integrated, and several G companies created; (iv) G and D integrated and separate T company created; (v) full unbundling. All of these options were analyzed based on five criteria: benefits for consumers, benefits for the GoL, support for liberalization, ease of implementation, and legal/regulatory 36