Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (TF TF-94587) TRUST FUND GRANTS IN THE AMOUNT OF US$14.

Transcription

1 Public Disclosure Authorized Document of The World Bank Report No: ICR Public Disclosure Authorized IMPLEMENTATION COMPLETION AND RESULTS REPORT (TF TF-94587) ON TRUST FUND GRANTS IN THE AMOUNT OF US$14.5 MILLION Public Disclosure Authorized TO THE WEST BANK AND GAZA FOR AN ELECTRIC UTILITY MANAGEMENT PROJECT March 24, 2017 Public Disclosure Authorized Energy Global Practice (GEEDR) Middle-East & North Africa Region (MENA)

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3 CURRENCY EQUIVALENTS (Exchange Rate Effective 07/01/2016) Currency Unit = NIS 1.00 = US$ 0.26 US$ 1.00 = NIS 3.85 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AFD AMRs COGAT CPS DISCOs DO EE EIB EIRR ESPIP EUMP FCV GEDCO GIS GWh HEPCO HV ICR ICT IEC IP ISR IT JDECO KPIs kwh M&E MCs MIS MOF MS Agence Française de Développement Automatic Meters Reading Systems The Coordinator of Government Activities in the Territories Country Partnership Strategy Distribution Companies Development Objective(s) Energy Efficiency European Investment Bank Economic Internal Rate of Return Electricity Sector Performance Improvement Project Electric Utility Management Project Fragility, Conflict, and Violence Gaza Electricity Distribution Company Geographic Information System Giga Watt hour Hebron Electric Power Company High Voltage Implementation Completion and Results Report Information and Communications Technology Israel Electric Corporation Ltd. Implementation Progress Implementation Status and Results Report Information Technology Jerusalem District Electric Company Key Performance Indicators kilo Watt hour Monitoring and Evaluation Municipal Councils Management Information System Ministry of Finance Moderately Satisfactory iii

4 MTR MV MW NBF NEDCO NIS NL NPV OCC PA PAD PDO PENRA PERC PETL PMU PPA PWC RE RP S SED SELCO TA TEDCO TF TOR TSO TTL VAT VCs WB WB&G Mid-Term Review Medium-Voltage Mega Watt Non-Bank Financed Northern Electricity Distribution Company New Israeli Shekel Net Lending Net Present Value Opportunity Cost of Capital Palestinian Authority Project Appraisal Document Project Development Objective(s) Palestinian Energy And Natural Resources Authority Palestinian Energy Regulatory Commission Palestinian Energy Transmission Company Project Monitoring Unit Power Purchase Agreement Pricewaterhouse Coopers Renewable Energy Restructuring Paper Satisfactory Securing Energy for Development Southern Electric Company Technical Assistance Tubas Electricity Distribution Company Trust Fund Terms of Reference Transmission System Operator Task Team Leader Value-Added Tax Village Councils West Bank West Bank & Gaza Vice President: Hafez M. H. Ghanem Senior Global Practice Director: Riccardo Puliti Country Director: Marina Wes Sector Manager: Erik Magnus Fernstrom Project Team Leader: Roger Coma Cunill ICR Team Leader: Emmanuel Py iv

5 WEST BANK AND GAZA ELECTRIC UTILITY MANAGEMENT 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 Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Special Annex on Net Lending and DISCOs Payment Performance Annex 4. Economic and Financial Analysis Annex 5. Bank Lending and Implementation Support/Supervision Processes Annex 6. Beneficiary Survey Results Annex 7. Stakeholder Workshop Report and Results Annex 8. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 9. Comments of Cofinanciers and Other Partners/Stakeholders Annex 10. List of Supporting Documents MAP v

6 A. Basic Information Country: West Bank and Gaza Project Name: Project ID: P L/C/TF Number(s): Electric Utility Management Project TF and TF ICR Date: 03/24/2017 ICR Type: Core ICR Lending Instrument: SIL Borrower: Original Total Commitment: Revised Amount: USD 14.5M Environmental Category: B Palestine Liberation Organization (for the benefit of the Palestinian Authority) USD 12.0M Disbursed Amount: USD 14.5M Implementing Agencies: Palestinian Energy And Natural Resources Authority - (PENRA) B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 05/29/2007 Effectiveness: n/a 09/30/2008 Appraisal: 04/01/2008 Restructuring(s): n/a 07/14/ /18/ /04/ /22/2015 Approval: 05/15/2008 Mid-Term Review n/a 12/08/2011 Closing: 09/30/ /30/2016 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Moderate Moderately Satisfactory Moderately Satisfactory 1 Additional financing processing vi

7 C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Government: Satisfactory Unsatisfactory Quality of Supervision: Moderately Satisfactory Implementing Moderately 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 No at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No 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 Power Theme Code (as % of total Bank financing) Infrastructure services for private sector development Access to urban services and housing Regulation and competition policy E. Bank Staff Positions At ICR At Approval Vice President: Hafez M. H. Ghanem Daniela Gressani Country Director: Marina Wes A. David Craig Sector Managers: Erik Magnus Fernstrom Jonathan Walters Project Team Leader: Roger Coma Cunill Somin Mukherji ICR Team Leader: ICR Primary Author: Emmanuel Py Emmanuel Py vii

8 F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) Original PDO 2 (from the Trust Fund Grant Agreement): Reduce the fiscal burden of the power sector on the Recipient s budgetary resources, through efficiency enhancement measures aimed at lowering deductions from clearance revenues for arrears owed to the IEC, including: (a) improved collection performance; (b) lower technical and non-technical losses; (c) reduction in payables to IEC on account of electricity purchases; (d) consolidation and increase in the number of electricity consumers; and (e) ensuring that NEDCO is fully operational. Revised Project Development Objectives (as approved by original approving authority) Revised PDO (from the Restructuring Paper, Sept. 4, 2013): Establish and strengthen key energy sector institutions to enhance collection performance of electricity bill payments, and restore power distribution systems in conflict-affected areas. (a) PDO Indicator(s) Indicator Indicator 1: Value: Baseline Value Original Target Values (from approval documents) Formally Revised Target Values 3 Actual Value Achieved at Completion or Target Years Net lending on account of power sector arrears to IEC was at US$240 million at the end of 2007; this will need to be reduced gradually to about US$40 million by the end of the project. 917 million NIS ($240 million) $40 million Indicator canceled in Sept Date achieved 12/31/ /30/2013 9/30/ million NIS ($264 million) 12/31/2015 (latest data) The inclusion of the Gaza share of net-lending (55% on average) is a major design flaw of the original project because, since 2003, GEDCO no longer pays IEC, even indirectly through PENRA, thus, since then, all IEC sales to Gaza are paid through net lending, thereby rendering the project Comments unaccountable for reducing the Gaza share of net lending. In the case of the West Bank, between 2008 and 2013, the ratio of net lending to IEC purchases has been reduced by a factor of 3. See Annex 3 for the discussion on net lending and the achievements between 2008 and Indicator 2: (Added At least three distribution utilities reach a 75% collection performance in Sept. 2013) Value: No None Yes Yes Date achieved 4/22/2008 9/30/2013 9/30/2016 9/30/2016 Achieved. Achieved by four West Bank s DISCOs (JDECO: 90.5%, SELCO: Comments 79.2%, HEPCO: 90.0%, and NEDCO: 98.4%). 2 There is a slight difference of PDO formulation with the PAD, which is mostly editorial. Both PDO formulations are essentially the same. 3 Revised during the level-one restructuring in September viii

9 Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values 3 Actual Value Achieved at Completion or Target Years Indicator 3: (Added PERC adopts a revised unified tariff for West Bank and Gaza in Sept. 2013) Value: No None Yes Yes Comments Achieved. The first unified tariff was issued by PERC in June Indicator 4: (Added in Sept. 2013) Establishment of PETL as evidenced by (i) Bank-approved business plan and (ii) nine staff recruited Value: No None Yes Yes Date achieved 4/22/2008 9/30/2013 9/30/2016 9/30/2016 Comments Achieved. Indicator 5: (Added in Sept. 2013) Establishment of NEDCO as evidenced by issuance of first invoice to residential customer Value: No None Yes Yes Date achieved 4/22/2008 9/30/2013 9/30/2016 9/30/2016 Comments Achieved. Indicator 6: (Added Indicator Five: Direct Project Beneficiaries (number), of which female (%) in Sept. 2013) JDECO: SELCO: HEPCO: GEDCO: NEDCO: Female (%) 182,657 14,790 30, ,163-49% (female) 193,875 40,000 35, ,453 63,148 None 240,000 40,000 34, , ,000 49% (female) 245,202 28,857 45, , ,029 52% (female) Date achieved 4/22/2008 9/30/2013 9/30/2016 9/30/2016 Original target achieved. Achievement rate of revised target was 91% against Comments target (642,540 consumers against the aggregate target of 706,800). 52% rate of female consumers achieved. Indicator 7: (Added Number of distribution transformers restored in Gaza in Sept. 2013) Value: 0 None Date achieved 4/22/2008 9/30/2013 9/30/2016 9/30/2016 Comments Achieved. ix

10 (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Date achieved 4/22/2008 9/30/2013 9/30/2016 9/30/2016 Indicator 1: JDECO SELCO HEPCO GEDCO NEDCO Weighted Average 4 Comments Indicator 2: JDECO SELCO HEPCO GEDCO NEDCO Weighted Average Comments Indicator 3: JDECO SELCO HEPCO GEDCO NEDCO Weighted Average Comments Indicator 4: Technical and non-technical losses 19.8% 16.0% 19.7% 16.0% 17.5% 11.0% 24.0% 14.0% 12.2% 10.2% 20% 14% Indicator canceled in Sept % 32.9% 20.4% 26.2% 16.6% 23% Not achieved. However the collection rate x (1 - losses) ratio - indicating the actual share of electricity received by West Bank s DISCOs (contributing directly to net lending) that was paid by end-consumers - went up from 41% in 2007 to 64% in 2013 and to 75% in 2015, compensating by far increased losses (see Annex 3). This increase in losses around might be due to: (i) increased non-technical losses (electricity theft) because of the significant IEC tariff increase (33%, from 0.33 NIS/kWh to 0.44 NIS/kWh in 2013); and (ii) increased losses because of the gradual taking over by the DISCOs (especially NEDCO and SELCO) of electricity operating assets of the municipalities and village councils in their areas (which had higher technical and non-technical losses because of worse technical conditions and poorer rural areas and/ or areas servicing refugee camps). Collection performance 91% 41% 60% 24% 42% 64% 98% 97% 71.4% % 50.8% 75% Indicator canceled in Sept % 79.2% 90.0% 65.0% 98.4% 85% Achieved on average although JDECO and SELCO have not reached their individual targets. Accounts payable to IEC (in months) Indicator canceled in Sept n/a Not achieved. However accounts payable to IEC improved overall between 2008 and 2015 in the West Bank despite a significant increase in electricity purchases from IEC (see Annex 3). Since Gaza/GEDCO no longer pays IEC, their accounts payable information is shown as n/a: not applicable. Number of consumers 4 Weighted average based on the size of IEC purchases. 5 Calculation from the PAD data: 60% x 1.19 = 71.4%; 24% x 1.64 = 39.4%; 42% x 1.21 = 50.8% x

11 Indicator JDECO SELCO HEPCO GEDCO NEDCO Total: Comments Indicator 5: Value: Comments Baseline Value 182,657 15,000 30, ,163 50, ,888 Exceeded. Original Target Values (from approval documents) 193,875 40,000 35, ,453 63, ,742 Four substations are functional 0% 100% (by 2012) Formally Revised Target Values Indicator moved to PDO level in Sept Indicator canceled in Sept Actual Value Achieved at Completion or Target Years 245,202 28,857 45, , , ,540 75% (only 3 of the 4 substations are complete) Partially achieved. The four-year delay in signing the contract for the EIB financed substations which only materialized in February 2012 was the main reason for the level-one restructuring. At closing on September 30, 2016, three of the four substations were complete. The fourth substation (in Ramallah) was 15% complete, and it is expected to be commissioned in July Indicator 6: (Added in Sept. 2013) Number of kilometers of 33 kv single core cable procured and delivered to JDECO Value: 0 None Comments Achieved. Indicator 7: (Added Number of distribution transformers procured and delivered to GEDCO in Sept. 2013) Value: 0 None Comments Achieved. Indicator 8: (Added in Sept. 2013) Establishment of PERC as evidenced by (i) PERC s Board first meeting, (ii) adoption of employee manual and (iii) six staff recruited Value: No None Yes Yes Comments Achieved. Indicator 9: (Added in Sept. 2013) Number of PETL employees completing training for substations operations and maintenance Value: 0 None 9 17 Comments Exceeded. Indicator 10: Completion of assessment study on NEDCO s organization and structure (Added in Sept. 2013) Value: No None Yes Yes Comments Achieved. Indicator 11: Launching of awareness campaign on PERC s role in the West Bank and Gaza (Added in Sept. 2013) Value: No None Yes Yes Comments Achieved. Indicator 12: Upgrade of JDECO s IT hardware and software (Added in Sept. xi

12 Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years 2013) Value: No None Yes Yes Comments Achieved. Indicator 13: (Added in Sept. Completion of assessment study on potential for renewable energy development in West Bank and Gaza 2013) Value: No None Yes Yes Comments Achieved. Indicator 14: Installation of Geographic Information System (GIS) in HEPCO (Added in Sept. 2013) Value: No None Yes Yes Comments Achieved. G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 12/15/2008 Satisfactory Satisfactory /20/2009 Satisfactory Satisfactory /15/2009 Satisfactory Satisfactory /20/2010 Satisfactory Satisfactory /24/2010 Satisfactory Satisfactory /22/2011 Moderately Satisfactory Satisfactory /05/2012 Moderately Satisfactory Satisfactory /14/2012 Moderately Satisfactory Satisfactory /23/2013 Satisfactory Moderately Satisfactory /16/2014 Satisfactory Satisfactory /10/2014 Satisfactory Satisfactory /17/2015 Satisfactory Satisfactory /22/2015 Satisfactory Satisfactory /13/2016 Satisfactory Satisfactory xii

13 H. Restructuring (if any) see Section 1.7 Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring PDO IP Amount Disbursed at Restructuring in USD millions 03/18/2011 S S /04/2013 Yes MS S /22/2015 S S I. Disbursement Profile Reason for Restructuring & Key Changes Made PDO level 2 restructuring: Amendment of the scope of Initial Start-up and Operating Expenditures for PERC. PDO level 1 restructuring: -Adjust components to reflect Bank-financed activities only. -Revise the PDO and the project outcomes/ performance indicators to reflect the results of the Bank-financed activities only. -Reallocate grant proceeds across categories. -Eliminate the financial covenants related to the DISCOs. -Extend the grant closing date to December 31, PDO level 2 restructuring: Second extension of the grant closing date to September 30, 2016 to use a balance of $432,367 in the designated account. xiii

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15 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. The Palestinian Authority (PA) was established in the occupied Palestinian Territories (the West Bank and Gaza) shortly after the Oslo Accords of The PA assumed civilian responsibility for most of the Palestinian residents: its security powers were limited, however, to the major urban centers (mostly what is designated as Area A 6 ). Israel maintained full control of large tracts of land around settlements and primary movement axes, leaving 61 percent of the West Bank ( Area C ) outside the PA s reach. Under the Oslo accords, this arrangement was intended as a temporary measure, but it still remains in force. It has since then been complicated by the take-over of the Gaza Strip by Hamas in June 2007, while its rival political party, Fatah, stays in control of the PA in the West Bank. 2. The Oslo Accords did not explicitly address the organization of the power sector in the territories. The status quo was maintained in the short-term, with the Israeli Electricity Department of the Civil Administration (ELDCA) having to ensure the existence of a broad electricity network reaching Palestinian cities, towns and villages. It then fell under the responsibility of the Palestinian regional councils to distribute electricity within their areas, which was provided to them in bulk by various providers (predominantly by IEC, the Israeli Electricity Corporation). However, the establishment of the PA, and effective Palestinian control over Area A provided an opportunity for the gradual build-up of a Palestinian Electricity Sector through the establishment of: The Palestinian Energy and Natural Resources Authority (PENRA) in 1995 to oversee the energy sector development. Its Chairman has rank of an Energy Minister in the PA. The progressive regrouping of electricity operating assets of Palestinian municipalities and village councils under electricity distribution utilities (the DISCOs ). The issuance of a Letter of Sector Policy for the Power Sector in 1997 that defined the strategic medium-term orientations for the sector, laying out an agenda of institutional reforms, and a first physical investment program. 3. The preparation of the Electric Utility Management Project (EUMP) benefited directly from the World Bank s West Bank & Gaza Energy Sector Strategy carried out in It was a multi-donor funded project 7 which was prepared and implemented as the umbrella program to complete the implementation of the recommendations of the Letter of Sector Policy, and to further advance the development of an autonomous Palestinian Electricity Sector by: Strengthening PENRA and the DISCOs, and supporting the establishment of NEDCO as the largest DISCO in the northern region of the West Bank. Contributing to the establishment of: (i) a regulator, the Palestinian Energy Regulatory Commission (PERC) that would regulate the sector and the DISCOs; and (ii) a Palestinian Energy Transmission Company (PETL) that would eventually own, operate and develop the transmission network, and act as the single buyer of electricity from suppliers. Financing the construction of four high-voltage (161kV) substations to allow the West Bank to be supplied at IEC s high voltage tariff, which is lower than IEC s flat tariff. 6 Area A: full civil and security control by the PA (18% of the West Bank). Area B: Palestinian civil control and joint Israeli-Palestinian security control (22% of the West Bank). Area C: full Israeli civil and security control (61% of the West Bank). 7 With only 10% of the financing brought by the Bank and the remainder by other donors (see Annex 1). 1

16 Reconfiguring the West Bank s power distribution system to be served by the new 161kV substations, thus significantly reducing the number of connection points with IEC, and increasing the PA s control over imported electricity from Israel in the West Bank. 4. Completion of this physical and institutional strengthening program and final negotiation of a PPA between IEC and PETL would ensure the existence of a more independent and institutionally robust Palestinian Electricity Sector under central authority from the PA with sector regulation by PERC, and ownership of transmission by PETL. In addition, this institutional arrangement would help to streamline the financial value chain in the energy sector by reducing leakages and increasing payments to suppliers. 5. At the time of Appraisal in 2008, the general condition of the power system in the West Bank and Gaza varied from barely adequate to deteriorated. IEC supplied electricity to Palestinian loads at 33kV or 22kV through IEC owned Medium Voltage (MV) lines. In most cases, the Palestinian utilities or municipalities did not have control of the supply through the transmission or the distribution lines that were served from the various 161kV substations or from various IEC connecting points. To that extent, the project was to finance four 161kV substations in the northern, central and southern areas of the West Bank in order to transfer supply from the existing 161kV substations controlled by IEC to the new ones to be owned and operated by PETL. A Commercial and Operating Agreement (PPA) would be signed between IEC and PETL and between PETL and the electric utilities respectively. The concept was to replace the majority of the existing scattered connection supply points, which were connected directly to IEC at the low to medium voltage level, to be served by these new 161kV substations. The project was to finance the reconfiguration of the distribution systems operated by the Palestinian utilities and served by these 161kV substations as well as the distribution rehabilitation needs and installation of prepaid meters. The project was also to create the Palestinian Energy Transmission Company (PETL) to own, operate and further develop the power transmission network in the West Bank and Gaza, including the new substations provided under the project. Under the PA s policy, PETL was to enter into power purchase agreements with future independent power producers. It would be the only entity in the West Bank & Gaza authorized to buy power from power producers for sale to retail power users. By bringing bulk supply under the control of PETL, the PA could then apply pressure on any utility or municipal/ village council (MC/ VC) that did not pay IEC for its power. The project was also to provide essential technical assistance for the institutional and capacity building of the electric utilities and PENRA in the West Bank and Gaza, consulting services for the management of the project and promoting the development of renewable energy and adoption of energy measures. 6. Achievement of the project was expected to arrest and substantially reduce the longstanding net lending issue in the power sector that deprived the PA of useful fiscal resources. Indeed, Palestinian DISCOs, municipal councils (MCs) and village councils (VCs) had high levels of arrears (unpaid electricity bills) owed to IEC. The non-payments or partial payments of these bills created deficits for the IEC which then led the Israeli government to proceed with monthly deductions (referred to as net lending from the electricity sector or as net lending throughout this report) from the clearance revenue 8 (tax and customs transfer) owed to the PA. The remainder accumulated as outstanding debt owed to IEC (which grew to $520 million in 2016). These deductions reached $240 million per year at the time of appraisal in 2007, which accounted for 15% of the PA s net revenues. As power consumption in the West Bank and Gaza was expected to keep growing, it was critical for the PA to preserve its fiscal space. 8 Clearance mechanism: Mechanism through which indirect taxes are collected by Israel on behalf of the PA and normally refunded via clearance procedures which were agreed in the 1994 Oslo accords. 2

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18 Box 1: West Bank and Gaza (WBG) Electricity Sector Summary West Bank and Gaza (WBG) are highly dependent on energy imports from neighboring countries with Israel providing 88% of all consumed energy in The West Bank (population 2.8 million) receives its electricity supply from: i) the Israeli Electricity Corporation (IEC), through over 200 connection points with a capacity of 890 MW, and ii) Jordan, through a medium voltage connection with capacity of 20 MW. Gaza (population 1.9 million) receives its electricity from: i) IEC, through 10 connection points with capacity of 120 MW, ii) Egypt, through 3 connection points with capacity of 30 MW, and iii) Gaza Power Plant (GPP), with a rated capacity of 140 MW although the plant normally runs at approximately 50% of its peak capacity due to Gaza s inability to afford the very high cost of its diesel fuel source. 1.2 Original Project Development Objectives (PDO) and Key Indicators 7. The original project development objective (PDO) was to reduce the fiscal burden of the power sector on the PA s budgetary resources, through efficiency enhancement measures aimed at lowering deductions from clearance revenues for arrears owed to the IEC, including: (a) improved collection performance; (b) lower technical and non-technical losses; (c) reduction in payables to IEC on account of electricity purchases; (d) consolidation and increase in the number of electricity consumers; and (e) ensuring that NEDCO is fully operational. 8. There was only one PDO level indicator at the onset of the project: Net lending on account of power sector arrears to IEC was at $240 million at the end of 2007; this will need to be reduced gradually to about $40 million by the end of the project. 9. The intermediate results indicators were the following for the then five DISCOs in the West Bank and Gaza 9 : (i) Technical and non-technical losses; (ii) Collection performance; (iii) Accounts payable to IEC; (iv) Number of Consumers; and (v) Four high-voltage substations are functional. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 10. The PDO was revised in 2013 to reflect only the outcomes of the activities financed by the Bank (accounting for 10% of the original project financing) therefore excluding the activities financed by other donors, which had incurred significant delays and thus were not anticipated to achieve the original project s results before the completion of the Bank-financed activities. The PDO was revised as follows: establish and strengthen key energy sector institutions to enhance collection performance of electricity bill payments, and restore power distribution systems in conflict-affected areas. 11. There were six PDO level results indicators as follows: (i) at least three distribution utilities reach a 75% collection performance; (ii) PERC adopts a unified tariff for West Bank and Gaza; (iii) establishment of PETL; (iv) establishment of NEDCO; (v) number of direct project beneficiaries; and (vi) number of distribution transformers restored in Gaza. Original PDO PDO Indicator(s) Intermediate Indicators Reduce the fiscal burden of the power sector on the PA s budgetary resources, through efficiency enhancement measures aimed at lowering deductions from Net lending on account of power sector arrears to IEC was at $240 million at the end of 2007; this will need to be reduced gradually to about $40 million by the end of the For the then five DISCOs in the West Bank and Gaza: (i) Technical and non-technical losses; (ii) Collection performance; (iii) Accounts payable to IEC; (iv) 9 One in Gaza (GEDCO), and four in West Bank: JDECO in the central area; SELCO and HEPCO in the southern area; and NEDCO in the northern area. 4

19 Original PDO PDO Indicator(s) Intermediate Indicators clearance revenues for arrears owed to the IEC, including: (a) improved collection performance; (b) lower technical and nontechnical losses; (c) reduction in payables to IEC on account of electricity purchases; (d) consolidation and increase in the number of electricity consumers; and (e) ensuring that NEDCO is fully operational. project. Number of Consumers; and (v) Four high-voltage substations are functional. Revised PDO (Sept. 2013) PDO Indicator(s) Intermediate Indicators Establish and strengthen key energy sector institutions to enhance collection performance of electricity bill payments, and restore power distribution systems in conflict-affected areas 1.4 Main Beneficiaries (i) At least three distribution utilities reach a 75% collection performance; (ii) PERC adopts a unified tariff for West Bank and Gaza; (iii) establishment of PETL; (iv) establishment of NEDCO; (v) number of direct project beneficiaries; and (vi) number of distribution transformers restored in Gaza. (i) Number of kilometers of 33 kv single core cable procured and delivered to JDECO; (ii) Number of distribution transformers procured and delivered to GEDCO; (iii) Establishment of PERC as evidenced by (a) PERC s Board first meeting, (b) adoption of employee manual and (c) six staff recruited; (iv) Number of PETL employees completing training for substations operations and maintenance; (v) Completion of assessment study on NEDCO s organization and structure; (vi) Launching of awareness campaign on PERC s role in the West Bank and Gaza; (vii) Upgrade of JDECO s IT hardware and software; (viii) Completion of assessment study on potential for renewable energy development in West Bank and Gaza; (ix) Installation of GIS in HEPCO. 12. The main project beneficiaries identified in the PAD were the electricity utilities (NEDCO, SELCO, HEPCO, JDECO and GEDCO); the Palestinian Energy Transmission Company (PETL) to be formed, the Palestinian Energy and Natural Resources Authority (PENRA), and the Palestinian Energy Regulatory Commission (PERC) to be formed. 1.5 Original Components (as approved) 13. Component 1 (financed by EIB): Supply and installation of four new bulk 161/33/22kV supply substations in the northern, central and southern areas of West Bank as an important part of the transmission system. Most of the connection points (33kV and 22kV and 400V) supplying the Palestinian loads by IEC were to be replaced and supplied from the new reconfigured distribution system served under these new 161kV substations. This system modification would allow most of the West Bank to be supplied at IEC s high voltage tariff, which is lower than IEC s flat tariff. 5

20 14. Component 2 (financed by the Bank and other donors): Development, reconfiguration and rehabilitation of distribution networks in West Bank and Gaza. (i) (ii) Development of the new power distribution system in the northern, central and southern areas of West Bank served by the new 161kV substation. The distribution networks serving the Palestinian loads would be reconfigured and served by the new substations; Rehabilitation and extension of distribution networks in all utilities in West Bank and Gaza. Supply of equipment/materials would be provided to all utilities for urgent network repairs. (iii) Installation of prepaid meters and automatic meters reading systems (AMRs) in all utilities of West Bank and Gaza (NBF). About 140,000 prepaid meters and 400 AMRs were to be procured by the PMU and installed by the utilities. 15. Component 3: Capacity Building and Technical Assistance (financed by the Bank and all donors): (i) (ii) Capacity building for all electricity utilities in the West Bank and Gaza; this would include technical assistance for the procurement of tools, vehicles, IT hardware/ software and training; Providing consulting services to PENRA for promoting the development and utilization of renewable energy resources and adopting energy efficiency measures. This component would assess the renewable energy resources of the West Bank and Gaza, particularly solar, and facilitate the development of an appropriate institutional and legal framework. Consulting services would also include the development of the next stage of the electricity sector reform and auditing services for the PMU; (iii) Providing engineering consultancy services (short and long term - NBF) to procure and supervise the construction of the four new 161 kv substations and the related connecting 161 kv lines and distribution development; (iv) Operating cost of the PMU; and (v) Start-up operating costs of PETL and PERC to support institution building. Summary Information on donor contributions: Components Actual/Latest Cost ($ mln) Donors/ Source of Funds Component 1 : Transmission 56.5 (a) Development of the four bulk supply substation 56.5 EIB 10 Component 2: Distribution 65.3 (a) Development of the new Northern Distribution System served by the new 161 kv SIS (b) Development of the new Southern Distribution System served by the new 161 kv SIS (c) Development of the new Central Distribution System served by the new 161 kv SIS (d) Rehabilitation of distribution systems (all utilities) 13.9 Italy 11 & Norway 6.6 Italy & Norway 3.0 World Bank 30.8 Norway/ EC/ WB/ Govt (e) Prepaid meters and AMR (all utilities) 11.1 AFD & Norway 10 Majoritarily EIB with funding from Norway for some auxiliary equipment. 11 Originally: EIB (in PAD). Then proposed to be Spain, and finally financed by Italy. 6

21 Components Actual/Latest Cost ($ mln) Component 3: Technical Assistance 17.6 (a) Capacity building (all utilities) 5.5 (b) Consulting Services for PENRA (renewable, energy efficiency, next stage of sector reform and auditing for PMU) 3.0 Donors/ Source of Funds World Bank, Norway World Bank, AFD (c) Consulting Services for project supervision 1.1 EIB (d) Operating Cost for PMU 2.0 Norway (e) Start-up operating cost for PETL and PERC 6.0 World Bank Total Baseline Cost Revised Components 16. As mentioned earlier, the project went through a level-one restructuring approved by the Board in 2013 that redefined the project s outputs and outcomes to only those financed by the Bank. They are indicated in Annex 2, and include: Power sector investments ($5.5 million): - Component 2 i/ c (Supply of 214 km of MV cables for JDECO; $3 million); and - Component 2 ii/ (Supply of equipment/materials to Gaza; $2.5 million). Capacity building ($9 million): - Partial financing of Component 3 i/: Capacity building for all the five utilities; - Partial financing of Component 3 ii/: Providing engineering consultancy services to PENRA for promoting RE and EE; and - Full financing of Component 3 v/: Start-up operating costs of PETL and PERC to support institution building. 1.7 Other significant changes 17. One level-one restructuring and two level-two restructurings were done: In July 2009: Additional financing of $2.5 million for supply of electricity materials and equipment to GEDCO for emergency rehabilitation of the electricity network in Gaza following the 2009 Gaza War. This became part of Component 2 ii/. In March 2011: level-two restructuring to amend the definition and scope of Initial Start-up and Operating Expenditures for PERC to be financed by the World Bank grant. In September 2013: level-one restructuring to: (i) Adjust components to reflect Bankfinanced activities only; (ii) Revise the PDO and the project outcomes/ performance indicators to reflect the results of the Bank-financed activities only; (iii) Reallocate grant proceeds across categories; (iv) Eliminate the financial covenants related to the DISCOs; and (v) Extend the grant closing date to December 31, 2015 to allow full disbursement of the funds allocated for PETL. In December 2015: level-two restructuring to extend the grant closing date to September 30, 2016 to use a balance of $432,367 in the designated account. 7

22 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 18. Soundness of background analysis. The project came out of the World Bank s West Bank & Gaza Energy Sector Strategy in 2007 which reviewed the state of the sector, identified the challenges, and recommended priorities for intervention. The project focused on some of its recommendations: (i) Strengthen the electricity system of the West Bank and Gaza, and develop a long term power supply plan; (ii) Develop the technical, financial and institutional capacity of the power utilities; (iii) Build and strengthen energy sector institutions; and (iv) Tackle the net lending issue. The Sector Strategy was sound and it provided useful insights for project preparation but it did not study in detail the net lending issue, and therefore, project preparation documents failed to capture its sheer complexity. This work however was well done by the Bank around the time of the level-one restructuring (with the Net Lending Report 12 ). 19. Project design. The original PDO was beyond the ability of the sole project to achieve. There were several flaws in the original project s design as explained in detail in Section 3.1, including (i) the PDO was beyond the ability of the sole project to achieve; and (ii) the M&E framework contained only one PDO level indicator, which is not good practice for designing a robust M&E framework. Including the Gaza share of net lending (averaging $117 million or 55% of the net lending from the electricity sector between 2007 and 2015) in the PDO was also a major design flaw: since 2003, GEDCO no longer pays IEC. The project activities were needed, but 90% of the funding was reliant on co-financing from other donors, with little possible leverage from the Bank. 20. Government s commitment was strong at the preparation stage. The project was seen as important for the future of the Palestinian Energy Sector, and two new institutions (PERC and PETL) were to be established by the project. 21. Risks. The risk level for the project in the PAD was high, mainly due to potential poor collection performance by the DISCOs. Some of the risks however (complex operating environment in the Palestinian Territories, and risk of delays in availability of co-financing) were identified but underestimated in hindsight. The narrative in the PAD did not reflect enough the difficult and complex operating environment in the Palestinian Territories that are subject to Israeli control and good-will for major electricity sector works and reforms (such as building and energizing the HV substations, recognizing PETL s mandate, and negotiating a PPA guaranteeing a lower IEC tariff). The original Bank financing accounted for only 8.6% of the total project cost ($12 million out of $140.1 million), and 75% of Bank financing was for Component 3 (Capacity Building and Technical Assistance). In this situation, the original project would have benefited from focusing on those investments, and not commit to the implementation of critical investments (such the HV substations) that relied exclusively on co-financing to materialize. The risk of delays in availability of cofinancing was rated Moderate in the PAD, but it was underestimated in hindsight. The project would have benefited from opting for parallel financing instead of co-financing for those investments. 2.2 Implementation 22. The following table summarizes the key dates and milestones for the project. The two wars in Gaza are underlined. As discussed in Part 1.1, the Palestinian energy sector is relatively young, which adds to the complexity of the overall operating environment. 12 West Bank and Gaza, Assessment and Action Plan to improve payment for electricity services in the Palestinian Territories, Study on Electricity Sector Contribution to Net Lending, November 25, 2014, World Bank (available on the internet). 8

23 Date Milestones/ Timeline June 2007 Gaza s takeover by Hamas. Fatah stays in control of the PA in the West Bank. May 2008 Board Approval Dec First Gaza War (Operation Cast Lead) Jan 2009 July 2009 Additional financing of $2.5 million for supply of electricity materials and equipment to Gaza/GEDCO Oct 2010 Agreement on the terms of the contract for the 4 HV substations (PA/ EIB agree with IEC) March 2011 Level-two restructuring to amend the definition and scope of Initial Start-up and Operating Expenditures for PERC Feb 2012 Signing of the contract for the 4 HV substations (PA/ EIB sign with IEC) Jan-July 2013 Discussion with the client on a potential "Net Lending Study" Aug 2013 "Net Lending Study/ Report" officially started by WBG (ASA processed in system) Sept 2013 Original project closing date / Level-one restructuring July - Aug Second Gaza War (Operation Protective Edge) 2014 Dec 2015 Level-two restructuring to extend the grant closing date to September 30, 2016 Jan 2016 Confirmation of Italian Soft Loan for the second stage of the development of the northern & southern distribution systems Sept Debt agreement signed by Israel and the PA / Revised project closing date July 2018 Commissioning of last substation (Ramallah) financed by EIB (Expected) 23. Implementation of the Bank financed activities was smooth. This is because Bank financed activities were limited to the supplies of goods and services without major civil works (which jeopardized the progress of the EIB part of the original project in the case of the four HV substations). The 214 km of MV cables were installed smoothly by JDECO and the equipment delivered in Gaza was installed quickly. All services/ training/ incremental operating costs were processed and procured effectively. The Bank moved fast to process and deliver an additional financing of $2.5 million to respond to an urgent situation after the 2009 Gaza War and deliver key equipment to GEDCO to restore power supply. At the time of the restructuring in September 2013, 19% (or $2.73 million) of the grant still had to be disbursed, most of which was for PETL s start-up operating costs. The 2013 restructuring sought an 18 month extension of the grant mainly to allow the establishment of PETL, which was awaiting the signing of the contract for the HV substations to take over the management of these future assets. 24. The progress of the activities financed by Norway and AFD was also smooth. Norway financed the first stage of the development of the Northern & Southern distribution systems, part of the rehabilitation of distribution systems for all utilities, capacity building for all utilities, the operating cost of the PMU, and part of the prepaid meters. AFD financed the remainder of the prepaid meters and work on energy efficiency (so mostly equipment and technical assistance which were straightforward to procure and implement). 25. The main issues faced during implementation however were (i) the difficulty to secure funding for Components 2 i/ (a) and (b) (development of the new power distribution system in the 9

24 northern and southern areas); and (ii) the four-year delay for the signing of the contract for the four EIB financed substations. The PAD s economic analysis anticipated that contract signing would occur in 2008 while it only materialized in February Components 2 i/ (a) and (b) were to be financed by EIB in the PAD (as a $22 million loan), but during implementation, this was soon replaced by a 17.3 million soft loan from Spain (which was originally planned for Gaza 13 ), which never materialized because of the 2008 global financial crisis that hit this country. The PA finally found a back-up solution with a $17.5 million soft loan from the Government of Italy which was signed in early The new distribution system in the northern and southern areas are now planned to be completed in September Norway, however, financed and completed the first stage of the development of the northern & southern distribution systems. Regarding the four EIB financed substations, it took two years for the PA/ EIB to agree with IEC on the terms of the contract (from May 2008 until October 2010). Then almost another year-and-a-half was needed for IEC to secure a special security insurance for coverage of damages caused by possible hostilities in the conflictaffected Palestinian Territories. The two year delay until October 2010 is due to: i. The realization by the PA and EIB that only IEC could effectively build these substations in the West Bank because of the complexity of the approval processes from Israeli authorities (COGAT) and the need to effectively interact with them, especially as the largest substation (Ramallah) was in Area C. ii. The fact that IEC had no obvious interest to speed up the construction of these substations, as this would reduce in the short-term their amount of sales (in billion NIS) to the West Bank because of the lower high-voltage tariff. iii. The necessity for EIB to go back to its Management Committee and Board to approve the restructuring of their original 45 million loan effective in 2005 that was originally to finance two of the four substations, 10 million of meters (later financed by AFD and Norway), and part of the new power distribution system in the northern and southern areas (later to be financed by Spain and then Italy). In particular, they had to secure the internal approval of a 44.5 million single-source contract for the construction of the four substations by IEC. iv. The political situation in the Palestinian Territories, with the Gaza War ( ), known as Operation Cast Lead. The War in Gaza affected the length of the negotiations on the terms of the contract between IEC/ Israel and the PA/ EIB. 26. Realizing that the successful achievement of Components 1 and 2 i/ (a) and (b) financed by EIB and Spain/ Italy was very much uncertain and beyond the ability of the Bank to control, it was decided a year after the mid-term review (that took place in December 2011) to proceed with a levelone restructuring, to focus the project only on the outputs and outcomes financed by the Bank. At closing, the three of the four substations that were not in Area C were complete, but the Ramallah substation was 15% complete (due mostly to delays in obtaining permits from Israeli authorities for infrastructure works in Area C 14 ), and it is planned to be commissioned in July This substation incurred further delays because of the complexity of operating in Area C in particular and in the Palestinian Territories in general. More generally, the wars in Gaza (in 2009 and 2014) adversely impacted the pace of project implementation in the form of delayed equipment imports and clearance 13 As part of a joint investment program with EIB and Norway - approved in 2005 and focused on improved electricity supply in the West Bank and Gaza - that partly merged with the EUMP. 14 Implementation delays due to lengthy processes in land expropriation and/or design modifications during the construction phase and/or suboptimal coordination with/from Israeli authorities. 10

25 at Israeli customs 15. The original project will be completed in September 2018 with the completion of the network financed by Italy. The restructuring focused on Bank financed activities (in terms of outputs and outcomes). All Bank financed activities were satisfactorily implemented and completed, and therefore the level-one restructuring led to a PDO upgrade from MS to S in December Monitoring and Evaluation (M&E) Design, Implementation and Utilization 27. M&E design. The original M&E design had several weaknesses: (i) as already mentioned, listing only one PDO level indicator (although reflecting the PDO) is not good practice for designing a robust M&E framework, as a project should be measured against its results on several PDO level indicators; and (ii) there was a lack of cohesion between the PDO, indicators, and activities: Activities could only affect part of the net lending issue in the West Bank, but not in Gaza. Since 2003, Gaza/ GEDCO no longer pays IEC. All IEC electricity sales to Gaza are paid by the PA through net lending or debt settlement. The M&E design assumed implicitly that net lending reduction was only dependent on improved financial performance of the DISCOs. This is ignoring the 175 municipalities and village councils that transact bilaterally with IEC, and represent roughly one third of the net lending. Net lending is caused by a range of issues 16 than go beyond sound DISCO financial management. Its sheer complexity was well described in the Net Lending Report. The M&E design of the restructured project appropriately reflected its outcomes and outputs. 28. M&E implementation. Implementation of the M&E system focused on regular reporting on the outcome and intermediate results indicators, as well as feedback on issues and their resolution. Data was reported bi-annually by the PMU (located in PENRA s building) in the project monitoring reports. For the original project, net lending and DISCOs financial performance are indicators that were already well tracked by the PA and the DISCOs, therefore data quality was good during implementation and at completion. The indicators of the restructured project were simpler and easy to report. 29. M&E utilization. The restructuring was an opportunity to update the M&E framework. Several indicators were kept while others were added. The net lending indicator was removed together with the individual DISCOs financial performance indicators (collection rates and accounts payable to IEC). Net lending and DISCOs financial performance will keep being tracked by the DISCOs, PETL and PERC. After the signing of the PPA with IEC in 2017, PETL will be the sole buyer of IEC s electricity (with control of all IEC connection points) and it will act as the TSO. It will therefore be the first institution in the PA to know first-hand about non-payments from the DISCOs, the municipalities, and the village councils. 2.4 Safeguard and Fiduciary Compliance 15 The wars in Gaza delayed the procurement process. Equipment clearance at Israeli customs could then take up to six months. This is not including delays with Israeli authorities approval of VAT exemption requests. This process took 2-3 months and PENRA had little control over it. It ended up delaying the imports of goods and consequently delaying project completion. 16 Inter alia: absence of a billing system, technical losses, electricity theft, non-payments by refugee camps and by local administrations, increased tariffs, local interests of the municipalities and village councils, high IEC s interest rates on non-payments, etc. 11

26 30. Environmental and Social Safeguards. The project was Category B. The planning of the four 161/33 kv substations included the preparation of Environment and Social Management Plans (ESMP) and Abbreviated Resettlement Action Plans (ARAP) in accordance with the Resettlement Policy Framework prepared by PENRA in 2008 and the World Bank guidelines for each of the substations. In September 2013, a Bank supervision mission found that PENRA was noncompliant with the Bank s safeguards policies for three of the four substations financed by EIB (Jenin, Nablus and Hebron). Civil works had been initiated prior to obtaining Bank s clearance/disclosure of the relevant safeguards instruments (ESMP and ARAP). Project affected people were identified prior to construction and the compensation process had started but it had not yet been completed 17. The issue was solved thanks to the proactivity of the Bank team and for the benefit of EIB. The safeguards rating was then upgraded to Moderately Satisfactory from Unsatisfactory in May 2014, and was kept until closing. 31. Procurement. Procurement of Bank financed activities ($5.5 million of power sector investments for JDECO/ GEDCO and $9 million of Capacity Building) was compliant with Bank rules. Procurement was rated Satisfactory in all ISRs throughout implementation. There were no procurement issues. 32. Financial Management. Project financial management met acceptable standards. Project funds were used for their intended purposes. During implementation, a technical audit was undertaken. Annual audit reports were submitted to the Bank on time, and no significant issues were identified. Financial management supervision and selected post-reviews of project accounts, documents, and internal control procedures confirmed that management of project funds was sound. 2.5 Post-completion Operation/Next Phase 33. Physical assets. The Bank financed elements of the project (see details in Annex 2) are being used and maintained by the respective DISCOs and PETL (there is only a GPS for PETL). The main power sector elements are: MV cables for JDECO, and transformers, cables, and poles for GEDCO. Concerning the assets of the original project, PETL has taken over the three completed HV substations, and it will take over the fourth one after its commissioning in July Seventeen of its employees have received training (financed by the Bank) from IEC on the operation and maintenance of these substations. Therefore once the existing substations are energized after the signing of the PPA (planned for June 2017), PETL will be able to operate them effectively. A first tranche of 125 MW (or 35% of the capacity of the three substations) is expected to be energized based on available feeders to evacuate the energy 18. Power evacuation will be increased to 100% once the new feeders and the distribution system financed by the Italian soft loan are completed in September PETL will also take over and maintain these assets financed by the Italians to disperse the power to West Bank s DISCOs. Finally the 244,600 prepaid meters financed by AFD and Norway are being used and maintained by the DISCOs. 34. Means of sustaining reforms and institutional capacity. The Bank financed elements of the project contributed to the establishment of PERC (in February 2010) and PETL (in October 2013). These two Palestinian institutions are now well on their feet, and are playing a key role in the sector. PERC, after its establishment, issued a unified tariff regulation for DISCOs. This retail power tariff ensures cost-recovery is only lightly subsidized, and compared to most Arab countries that have very 17 The Jerusalem Office also received a complaint by from the closest neighbor to the Nablus substation. The task team met with the complainant, four other neighbors, and the mayor. The task team brought up their concerns to the attention of PENRA and EIB. The Bank promptly sent an official written response to the complainant. 18 Jenin substation is even expected to be energized with MW before June

27 high tariff subsidy levels, it is among the good models in the region, reflecting opportunity costs reasonably well. PETL has a business plan (prepared in 2013 by PWC), and it was established on time to take over the substations, and to negotiate a PPA with IEC. It is now ready to play its full role in the Palestinian Energy Sector. The Bank financed study on the potential for renewable energy development in West Bank and Gaza led to the issuance of the Palestinian Renewable Energy Strategy ( ) by PENRA. The Bank and AFD also supported PENRA on the energy efficiency (EE) agenda, with the preparation of a National Energy Efficiency Action Plan, and specific programs. The Bank financed a pilot municipal street-lighting program while AFD provided a grant to establish an EE Unit within PENRA to identify, through energy audits, priority EE interventions in different sectors (industrial, public, service, and buildings) and conduct a comprehensive EE awareness campaign. Two financial mechanisms, namely a revolving fund and an interest subsidy scheme, were subsequently set up and the second phase of the program is being financed by AFD and the Palestinian private sector. 35. PENRA has submitted for PA cabinet review the Palestinian Energy Sector Strategy which is the Master Plan for PENRA and highlights the strategic vision moving forward. The strategy highlights the forecasted demand growth and lays out the needed power supply and transmission expansion to meet this demand. From the power supply perspective, PENRA s strategy is to reduce dependency on any one source below 50% while allowing the possibility of importing all needs in case of emergency. From the transmission perspective, the strategy aims to lay out a transmission backbone in the West Bank in order to allow power generated by Independent Power Producers to be evacuated through the Palestinian s own grid. There are also plans to bring an additional high voltage power line to Gaza for additional power. From the institutional reform perspective, there is a reshuffling of posts both within PENRA and GEDCO aiming to improve relations between PA and Hamas in terms of regulating the energy market. From a financial perspective, PENRA recognizes the vital need to improve the value chain in order to honor the Electricity Agreement and foster relations with Israeli side. Therefore, various reforms are under way to tighten the payment security of the Palestinian energy sector institutions including municipalities and village councils such as enforcing the escrowing of bill payments which have already been widely adopted by over 100 municipalities and village councils. 36. Next phase / follow-up operation. Building on these achievements, the Bank is now preparing a high-level analytical study (Securing Energy for Development - SED ) to advise Palestinian Energy Sector authorities on the strategic priorities for the next 15 years. One aspect of the study is to provide PENRA, PERC, and PETL with a tariff forecast/ simulation model and a planning model, which are proving very useful and timely for their ongoing PPA negotiations with IEC. The SED study makes a full set of recommendations in sector investments, economics, markets, policies, and it recommends maximum diversification to improve energy security and reduce dependence on any one source. An effective way to diversify given the geopolitical context is through the introduction of various renewable energy sources. In addition to the SED study, the Bank is preparing a follow-up project to the EUMP: the Electricity Sector Performance Improvement Project (ESPIP). This project contains four components: i) Strengthening the capacity of Palestinian electricity sector institutions: PETL and PERC, ii) Improving the operational performance of Palestinian Electricity Distribution Companies (DISCOs), iii) Improving energy security in Gaza with solar energy, and iv) Technical Assistance, Capacity Building and Project Management. Components 1 and 2, in particular, follow in line from the EUMP project. Component 1 supports PETL s technical, operational and legal functions to strengthen their capacity until they become fully operational. The component also supports PERC in reinforcing their ability to monitor and regulate the sector and to set tariffs. Component 2 focuses on four DISCOs in the West Bank and seeks to improve financial operations through a Revenue Protection Program (RPP) which targets a small, high value segment of 13

28 customers who consume the greatest amount of electricity. This would be done by installing smart metering technology to monitor their usage and ensure 100% of delivered electricity is billed thereby decreasing the significant non-technical losses (theft) in the system. This technology not only allows remote monitoring functionality but it can also more easily detect tampering than pre-paid meters. Component 2 will also work with various DISCOs to see what enterprise resource planning IT tools and software they are lacking to effectively operate their business. Lastly, a Bank-executed programmatic TA activity is under development to operationalize some of the institutional and policy recommendations of the SED study. The programmatic TA will also support ESPIP by providing the underlying analysis to build the relevant projects. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Rating: Substantial for the original project and High for the restructured project Relevance of Objectives Rating: High for both projects (original and restructured) 37. Original project. Rating: High. The original project objective was to reduce the fiscal burden of the power sector on the PA s budgetary resources, through a number of efficiency enhancement measures aimed at lowering deductions from clearance revenues for arrears owed to IEC. Lowering the fiscal burden of net lending in the power sector on the PA s budgetary resources remains relevant today for the West Bank and Gaza s energy sector. The FY15-16 Assistance Strategy (page 16) mentions the issue of non-payments to IEC and net lending from the power sector. Net lending (all sectors included: water, electricity, health, and sewage) continues to be an issue for the Palestinian Authority, driven in part by Gaza for the energy sector. According to the latest biannual IMF Report to the Ad Hoc Liaison Committee (August 2016), it accounted in 2015 for 11% of the PA s net revenues. The electricity sector has averaged about 63% of the net lending for the past four years. 38. Restructured project. Rating: High. The project went through a level-one restructuring in September 2013, which consisted in reducing the project scope of interventions and outcomes to those financed by the Bank only. The PDO was changed to: establish and strengthen key energy sector institutions to enhance collection performance of electricity bill payments, and restore power distribution systems in conflict-affected areas. Improving overall system performance (in particular, technical and non-technical losses and collection performance) and continuing to strengthen the institutional capacity of key energy sector institutions to achieve this remain objectives of the followup ESPIP operation under preparation (Board approval expected in July 2017). Relevance of Design Rating: Modest for the original project and Substantial for the restructured project 39. Original project. Rating: Modest. There were several flaws in the original project s design, mostly surrounding the PDO and the M&E framework: i. First, if the PDO was relevant, net lending is a complex issue (as documented in the Net Lending Report) that the project could not entirely solve on its own for design reasons but also in light of the particular situation in Palestinian Territories. There were two design flaws affecting the PDO: (a) Including the Gaza share of net lending (averaging $117 million or 55% of the net lending from the electricity sector between 2007 and 2015) in the PDO was a major design flaw: since 2003, GEDCO no longer pays IEC. All IEC electricity sales to Gaza are paid by the PA through net lending or debt settlement. This situation was reinforced by the effective take- 14

29 over of the Gaza Strip by Hamas in June 2007 (one year before Appraisal), while its rival political party, Fatah, stayed in control of the PA in the West Bank. Since 2007, the PA has no leeway on net lending from the power sector in Gaza. Thus the project could at best be expected to help reduce the West Bank s share of net lending. (b) In the case of the West Bank, the project focused on four DISCOs that together account for about 75% of all IEC sales to the West Bank. The West Bank s municipalities and village councils (VCs) that accounted in 2014 and 2015 for roughly one third of the net lending were not systematically covered by the project s investments that focused on four of the DISCOs, PETL, and PERC. ii. There were also two weaknesses specific to the particular situation in Palestinian Territories affecting the PDO: (a) Development outcomes in the West Bank and Gaza are affected by fragility, conflict, and violence (FCV). The West Bank, for example, is home to nearly 775,000 registered refugees 19, around a quarter of whom (about 200,000 or 7.4% of West Bank Palestinians) live in 19 camps. Payment of electricity by refugee camps is a sensitive political issue for the PA, and usually bills are not paid, thus adding up to non-payments that have to be settled with IEC through net lending or debt settlement. (b) In the case of the West Bank, 95% of the electricity comes from Israel (IEC), and IEC is therefore in a quasi-monopolistic position in this market. In the absence of a fairly negotiated PPA (that is expected to be signed in June 2017), IEC could very well increase tariffs under the control of the Israeli regulator but without the prior consent of the PA/ PENRA. It did increase them substantially - by 33% - between 2010 and 2014, which made the PDO target even more difficult to reach. iii. Third, the original PDO target values were too ambitious and not realistic. If the project could have indeed been held accountable for reducing net lending in the West Bank (as discussed in Annex 3), the 80% reduction target (from $100 million to $20 million in 5 years; in p. 52 of the PAD) was extremely ambitious and not realistic given the rapid growth in electricity sales (7.5% per year) and the possible increase in electricity prices from IEC. iv. Fourth, the Bank financed activities (8.6% of the original project cost, and 10% after additional financing) could not reach the PDO on their own, and could only marginally affect it. They financed $9 million of capacity building activities, and $5.5 million of power sector investments (for JDECO and GEDCO), which was marginal compared to the overall investment program of the original EUMP in the West Bank. Without financing from other donors (especially EIB), the original EUMP program could not be fully implemented. Its final success also relied on the HV substations that were completely out of the Bank s control, but that depended on EIB for their financing and construction, and on IEC/COGAT for their use (which had to be willing to negotiate a PPA with PENRA, knowing that this could entail less short-term revenues for IEC). v. Fifth, there was only one PDO level indicator, which - although reflecting the PDO - is not good practice for designing a robust M&E framework, as a project should be measured against its results on several PDO level indicators. 40. Restructured project. Rating: Substantial. In hindsight, the restructured project s PDO was designed along what the Bank financed activities could achieve on their own. It was simple and well targeted. The M&E design appropriately reflected the outcomes and outputs. 19 Source: UNWRA: 15

30 Relevance of implementation Rating: Substantial for both projects (original and restructured) 41. Bank s implementation assistance was responsive to changing needs and the operation remained important to achieving the PA s and the Bank s development objectives: The Bank moved fast during implementation to process an additional financing of $2.5 million for emergency rehabilitation of the electricity network in Gaza following the 2009 Gaza War ( Operation Cast Lead ). The Bank team conducted a mid-term review and a year after started to prepare a level-one restructuring after which all implementation ratings (PDO level and IP ratings) were satisfactory. Even if delayed and excluded from the scope of the revised project, the HV substations and the reconfiguration of the West Bank distribution network were needed to negotiate a comprehensive PPA with IEC that would reduce the electricity purchase tariff for PETL. Thanks to the Bank financed TA component, PETL was operational on time to negotiate the PPA with IEC and to take over the management of the HV substations and of all IEC s connections points to Palestinian load centers. 3.2 Achievement of Project Development Objectives Rating: Modest for the original project, and High for the restructured project 42. A split assessment of the project efficacy during the periods before and after the September 2013 restructuring is conducted for the following reasons: (i) there was a change of PDO, (ii) project financing was limited to Bank financing only ($14.5 million), and finally (iii) the M&E framework was substantially revised. Original project: (May September % of Bank funding disbursed) Objective: Reduce the fiscal burden of the power sector on the PA s budgetary resources, through efficiency enhancement measures aimed at lowering deductions from clearance revenues for arrears owed to the IEC, including: (a) improved collection performance; (b) lower technical and nontechnical losses; (c) reduction in payables to IEC on account of electricity purchases; (d) consolidation and increase in the number of electricity consumers; and (e) ensuring that NEDCO is fully operational. Project efficacy. Rating: Modest PDO Level Indicators Baseline Value Original Target Values (from PAD) Actual Value Achieved at Completion Date achieved 12/31/2007 9/30/ /31/2015 Net lending on account of power sector arrears to IEC was at US$240 Indicator 1: million at the end of 2007; this will need to be reduced gradually to about US$40 million by the end of the project. 917 million NIS 1017 million NIS Value: $40 million ($240 million) ($264 million) 16

31 Intermediate Indicators Baseline Value Original Target Values (from PAD) Actual Value Achieved at Completion Date achieved 4/22/2008 9/30/2013 9/30/2016 Indicator 1: Technical and non-technical losses JDECO 19.8% 16.0% 23.9% SELCO 19.7% 16.0% 32.9% HEPCO 17.5% 11.0% 20.4% GEDCO 24.0% 14.0% 26.2% NEDCO 12.2% 10.2% 16.6% Weighted Average 20 20% 14% 23% Indicator 2: Collection performance JDECO 91.0% 98.0% 90.5% SELCO 41.0% 97.0% 79.2% HEPCO 60.0% 71.4% 90.0% GEDCO 24.0% 39.4% 65.0% NEDCO 42.0% 50.8% 98.4% Weighted Average 64% 75% 85% Indicator 3: Accounts payable to IEC (in months) JDECO SELCO HEPCO GEDCO n/a NEDCO Weighted Average Indicator 4: Number of consumers JDECO 182, , ,202 SELCO 15,000 40,000 28,857 HEPCO 30,420 35,266 45,660 GEDCO 154, , ,792 NEDCO 50,648 63, ,029 Total: 432, , ,540 Indicator 5: Four substations are functional Value: 0% 100% (by 2012) 75% (only 3 of the 4 substations are complete) 43. The project s achievement of its PDO is rated Modest for the original project. Although the original PDO was not well targeted and the component activities and outcomes relied on other financiers to a large extent, the actual results achieved cannot be stated to be negligible. Indeed, a 20 Weighted average based on the size of IEC purchases. 17

32 detailed discussion in Annex 3 shows that if the project could not be held accountable for reducing the Gaza share of net lending 21, it did contribute substantially to avoid a further deterioration of net lending in the West Bank 22 in an unforeseen context at appraisal whereby IEC electricity purchases (in million NIS) have been multiplied by 2.3 in six years 23. The ratio of West Bank s amount of net lending to IEC purchases (in million NIS) went from 44% at appraisal in 2007 to 16% at the time of the restructuring in three times less. This shows some improvement in the financial discipline of West Bank s DISCOs and municipalities in their payment of IEC s bills. Box 2 (extracted from Annex 3): Containment of net lending in West Bank despite a significant surge in electricity purchases from IEC West Bank s electricity purchases from IEC grew very significantly between 2007 and 2013 by an average of 14.7% per annum (eg. they were multiplied by 2.3 in six years) primarily because of two factors: (i) an average 7.5% annual increase in power purchased from IEC (which went up from 2,494 GWh in 2007 to 3,849 GWh in 2013); and (ii) a substantial increase of 33% in the IEC tariff from 0.33 NIS/kWh in 2010 to 0.44 NIS/kWh in It is interesting to note that despite this very significant increase in West Bank s electricity purchases from IEC (in million NIS), West Bank s net lending averaged 342 million NIS ($89 million) between 2007 and 2013, which is 11% below the 2007 baseline. However, more interestingly, when looking at the ratio of West Bank s net lending to IEC purchases between 2007 and 2013, one can see an improvement in West Bank s payment discipline of IEC s bills: Purc Mill NIS) NL/ Pur (%) % % % % % % % Aver % The ratio of West Bank s amount of net lending to IEC purchases (in million NIS) indeed went from 44% at appraisal in 2007 to 16% at the time of the restructuring in times less as shown by the graph above, which compares the ratio of West Bank s net lending to IEC purchases (in %) for each year to its baseline value at appraisal (44%). Between 2010 and 2013, this ratio was 20% on average, so 2.5 times less than at appraisal (44%), which shows a notable improvement of the financial discipline of West Bank s DISCOs and municipalities in their payment of IEC s bills. 44. The analysis in Annex 3 shows that this improvement can be linked to: A very substantial increase in West Bank s DISCOs collection rates from 49% in 2007 to 77% in Including Gaza, at completion, the weighted average of the collection rates of the 5 DISCOs was 85%, well above the original target value of 75%. 21 That is 55% of total net lending in the electricity sector, and that has averaged $117 million between 2007 and % less than its 2007 baseline value of $140 million. 22 That reached $80 million in % less than the 2007 baseline value. 23 Due to: (i) an average 7.5% annual increase in power purchased from IEC; and (ii) a substantial tariff increase of 33%. 18

33 However, if losses slightly increased from an average of 20% to 23% (due to increased nontechnical losses/ electricity theft), the collection rate x (1 - losses) ratio - indicating the actual share of IEC electricity received by West Bank s DISCOs 24 that was paid by end-consumers - went up from 41% in 2007 to 64% in 2013 and to 75% in 2015, compensating by far increased losses (see Annex 3). Accounts payable of West Bank s DISCOs improved overall between 2008 and At completion, they had reduced to 8.5 months, a bit higher than the target value of 1.9 months but much less than the baseline value. The implementation of: (i) a significant prepaid meter deployment program (financed by other donors) under the original project, that allowed more than 40% of West Bank s electricity consumers to have access to a prepaid meter by 2013; and (ii) the progressive establishment of West Bank s DISCOs with their customer basis expanding from 278,725 in 2007 to 420,748 at completion (642,540 with GEDCO), thereby far exceeding the original target value of 332,289 (512,742 with GEDCO). 45. In addition, besides improving data collection and management (through the installation and use of a GIS in HEPCO Hebron), the project increased access in Hebron district (under part of component 2), and provided electricity access to several villages and small communities mostly in Hebron district. Restructured project: (September 2013 September % of Bank funding disbursed) Objective: Establish and strengthen key energy sector institutions to enhance collection performance of electricity bill payments, and restore power distribution systems in conflict-affected areas. Project efficacy. Rating: High Actual Value PDO Level Original Target Baseline Value Achieved at Indicators Values (from RP) Completion Date achieved 4/22/2008 9/30/2013 9/30/2016 Indicator 1: At least three distribution utilities reach a 75% collection performance Value: No Yes Yes Indicator 2: PERC adopts a revised unified tariff for West Bank and Gaza Value: No Yes Yes Establishment of PETL as evidenced by (i) Bank-approved business Indicator 3: plan and (ii) nine staff recruited Value: No Yes Yes Indicator 4: Establishment of NEDCO as evidenced by issuance of first invoice to residential customer Value: No Yes Yes Indicator 5: Indicator Five: Direct Project Beneficiaries (number), of which female (%) JDECO: 182, , ,202 SELCO: 14,790 40,000 28,857 HEPCO: 30,300 34,800 45,660 GEDCO: 154, , , Those contributing majoritarily to net lending (see Annex 3), eg. NEDCO, HEPCO, and SELCO. 19

34 NEDCO: - 200, ,029 Female (%) 49% (female) 49% (female) 52% (female) Indicator 6: Number of distribution transformers restored in Gaza Value: Actual Value Intermediate Original Target Baseline Value Achieved at Indicators Values (from RP) Completion Date achieved 4/22/2008 9/30/2013 9/30/2016 Number of kilometers of 33 kv single core cable procured and Indicator 1: delivered to JDECO Value: Number of distribution transformers procured and delivered to Indicator 2: GEDCO Value: Establishment of PERC as evidenced by (i) PERC s Board first Indicator 3: meeting, (ii) adoption of employee manual and (iii) six staff recruited Value: No Yes Yes Number of PETL employees completing training for substations Indicator 4: operations and maintenance Value: Completion of assessment study on NEDCO s organization and Indicator 5: structure Value: No Yes Yes Launching of awareness campaign on PERC s role in the West Bank Indicator 6: and Gaza Value: No Yes Yes Indicator 7: Upgrade of JDECO s IT hardware and software Value: No Yes Yes Completion of assessment study on potential for renewable energy Indicator 8: development in West Bank and Gaza Value: No Yes Yes Indicator 9: Installation of Geographic Information System (GIS) in HEPCO Value: No Yes Yes 46. The restructured project limited itself to the Bank financed activities, and achieved its PDO. The Bank project had a positive impact on institutional development and on longer-term development of the country s capacity and institutions. PERC and PETL were established respectively in 2010 and in 2013 with financial assistance from the Bank and are playing their role in the sector (see part 3.5 b). The first unified tariff was issued by PERC in June 2011 under a rate of return regulation (cost plus) approach and was applied to all electricity distribution companies and municipalities that distribute electricity. This was a good step for the consolidation of the Palestinian Electricity Sector, as before, each electric utility had its own tariff system. Collection performance of electricity bill payments from the 5 DISCOs has been enhanced from 64% (in 2008) to 80% (in 2013, at the time of the restructuring), and to 85% in 2015, in large part due to the installation and use of 20

35 prepaid meters under the project 25. The Bank moved fast with the processing of $2.5 million additional financing to respond to an urgent situation in Gaza after the 2009 War and deliver key equipment to restore power supply. 47. All its fifteen indicators (PDO level and intermediate) were fully achieved, except one of the six PDO level indicators (number of direct project beneficiaries) that was very substantially achieved at 91%. This is because the target for one of the DISCOs (NEDCO) was probably set too high (200,000 direct project beneficiaries) during the level-one restructuring, while its original target in the PAD was 63,148. Even the final achievement on this sub-indicator (101,029) is well above the original target set in the PAD. 48. Finally, despite its limited financing ($14.5 million) compared to other donors, the Bank played a key role in the sector dialogue. It took the lead for building the core sector institutions (PERC and PETL), and contributed significantly to the understanding of the complex issue of net lending, with the production of the Net Lending Report (which preparation was launched in 2013 before the levelone restructuring). This report was acknowledged by the client and by all donors as a reference document on the Palestinian Electricity Sector. 3.3 Efficiency Rating: Substantial for both projects (original and restructured) 49. Cost effectiveness was reasonable. The total cost of the original project is $139.5 million compared to the appraisal estimate of $140.1 million. 50. Economic Analysis. Rating: Substantial. Since 81% of the Bank grant was disbursed at the time of the restructuring, the efficiency rating at the ICR stage is largely determined by the efficiency rating of the original project. Because the restructured project (the Bank financed elements) is a subset of this larger project, only one economic analysis is done at the ICR stage: that of the original EUMP program. The same economic evaluation approach carried out at the PAD stage is carried out at the ICR stage (see Annex 4). 51. The two main parameters that determine the economic benefits are: (i) the tariff reduction of IEC electricity sales (following the energization of the HV substations) that will be reflected in the PPA currently being negotiated by IEC and PETL and which is expected to be signed in June 2017 (the base case scenario is a 10% tariff reduction, with a sensitivity analysis to 5% and 15%); and (ii) the reduction of technical losses following the rehabilitation program of the distribution systems (conservatively taken as 12.5% in the base case scenario, halfway between the 12% reported by PERC and the PAD s estimate of 13%). 52. For the base case scenario, we find an EIRR of 29% and an NPV (at 12 percent) of $98.7 million (in 2008 NIS), which is higher than the PAD stage (respectively: 23% and $83.8 million in 2008 prices). This is because the PAD envisaged a lower tariff reduction (of 4.3%). Despite the delay in commissioning and energizing the HV substations, the economic benefits of the original EUMP project are still very significant, and they will ultimately depend on the tariff agreed between IEC and PETL in the PPA, expected to be signed in June Under the EUMP, 244,600 prepaid meters (15,600 three-phase, and 229,000 single-phase) were purchased and installed as follows: 25% went to JDECO; 41% to NEDCO and TEDCO; 28% to HEPCO and SELCO (and 6% to Gaza/ GEDCO). This was 75% more than planned at appraisal. By 2013, about 40% of West Bank s electricity consumers had a prepaid meter. The future trend will be to install smart meters (under the follow-up World Bank s ESPIP operation) which are more advanced and offer two-way communication with the meter. 21

36 53. Financial analyses of electricity utilities reveal a widely varying financial performance. Financial projections for the utilities are included in Annex 4; these are based on historical financial data and assumptions for financial projections agreed in the context of the SED study. 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 54. Based on a substantial relevance, a modest achievement of its PDO (but with substantial progress accomplished in the discipline of West Bank s DISCOs and municipalities in their payment of IEC s bills), and a substantial efficiency, the outcome rating of the original project is assessed as Moderately Unsatisfactory. Based on high rating for relevance, high rating for efficacy, and substantial rating for efficiency, the outcome rating of the restructured project is assessed as Highly Satisfactory. According to ICR guidelines, a split evaluation is carried out for rating the outcome of projects with formally revised objectives, as shown below. The overall outcome rating of the project is thus assessed as Moderately Satisfactory. Against Original PDOs Against Revised PDOs 1 Rating MU HS - 2 Rating value Weight (% disbursed before/after PDO change) Overall 81% 19% 100% 4 Weighted value (2 x 3) Final rating (rounded) / MS 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 55. Poverty Impacts and Social Development. The project did not have a direct poverty reduction objective, although about 25 percent of Palestinians live below the poverty line (about 20% in the West Bank and 40% in Gaza). Under the original project, AFD financed an assessment study on poverty and social impacts of electricity prepaid meters (February 2013) carried out in the West Bank. It showed that 44% of households surveyed received social/ welfare assistance from different sources, and 19.8% of households surveyed received assistance from the Ministry of Social Affairs (through direct cash transfer of about 50 NIS per month) that is provided only to households suffering from extreme poverty. The study also made several recommendations for the poor, inter alia: developing a progressive tariff system providing a discount for the poor tied with a maximum limit for consumption, and exempting the poor from surcharges such as street lighting fees. The expected tariff reduction negotiated in the PPA by PETL and IEC if passed through by PETL in the retail tariff to the West Bank s DISCOs and by the DISCOs in the end-user tariff would have a positive impact on the poor. 56. Gender Aspects. The project did not have any specific gender development outcome. From the indicators of the restructured project, it would appear that more than 50% of direct project beneficiaries were female. There are also several women in senior positions in key Palestinian energy sector institutions (PENRA, PERC, and PETL). (b) Institutional Change/Strengthening 22

37 57. The Bank project had a positive impact on institutional development and on longer-term development of the country s capacity and institutions. PERC and PETL were established respectively in 2010 and in 2013 with financial assistance from the Bank and are playing their role in the sector. PERC regulates the sector and the DISCOs, and after its establishment, it issued a unified tariff regulation. Its responsibilities include: setting tariffs on the basis of commercial considerations with due regard to the needs of the vulnerable segments of the population, reviewing and providing recommendations on licenses, monitoring and enforcing licensees performance, resolving disputes among stakeholders of the sector, and disseminating information and educating consumers. Since its establishment, PETL has prepared a business plan (2013), and its technical engineers have completed a training conducted by IEC on operating the HV substations that are already in PETL s hands. It was officially recognized by Israel s Government, IEC, and COGAT in September 2016 as the central Palestinian entity in the field of electricity engaging in commercial relations with IEC under the terms of a PPA (and thus as the sole Palestinian buyer of IEC s electricity). After the signing of the PPA, it will take over the former IEC connection points to Palestinian loads, and it will own, operate and develop the Palestinian transmission network, and the HV substations. 58. In addition, the project built institutional knowledge and promoted the development of renewable energy and energy efficiency as follows: Renewable Energy (RE): The Bank financed study on the potential for renewable energy development in the West Bank and Gaza led to the issuance of the Palestinian RE Strategy ( ) by PENRA. PENRA initiated the Palestinian Solar Initiative (PSI) and completed an assessment of different RE sources in West Bank & Gaza. A Wind and Solar Atlas in West Bank & Gaza was produced. Energy Efficiency (EE): The Bank and AFD supported PENRA on the EE agenda, with the preparation of a National Energy Efficiency Action Plan approved by the Cabinet of Ministers, and specific programs. The Bank financed a pilot municipal street-lighting program to replace existing street lighting in 11 municipalities (see summary in Annex 2). AFD provided a grant to establish an EE Unit within PENRA to identify, through energy audits, priority EE interventions in different sectors (industrial, public, service, and buildings) and conduct a comprehensive EE awareness campaign. Two financial mechanisms, namely a revolving fund and an interest subsidy scheme, were subsequently set up and the second phase of the program is being financed by AFD and the Palestinian private sector. 59. Based on this work, PENRA issued: (i) The general electricity law (2012), (ii) the renewable energy and energy efficiency law, (iii) secondary legislations and regulations for renewable energy, and (iv) it obtained Cabinet s approval of the National Energy Efficiency Action Plan. (c) Other Unintended Outcomes and Impacts (positive or negative) Not applicable. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable. 23

38 4. Assessment of Risk to Development Outcome Rating: Moderate 60. The risk at closing that development outcomes in the West Bank will not be maintained or realized (e.g. lower IEC tariff after the signing of the PPA, and improved payment discipline of the DISCOs) is Moderate. Net lending from the West Bank (that has averaged $96 million per year since 2007) is expected to keep reducing in the future because of these achievements and with support from the follow-up operation ESPIP. The signing of the PPA and the subsequent tariff reduction (that will also reduce net lending) are enshrined in the Agreement on the Principles of the Palestinian Debt signed by Israel and the PA on September 12, The fourth substation (Ramallah) financed and supervised by EIB will be commissioned in July 2018 (six years after contract signing), and the new feeders and the distribution system financed by the Italian soft loan will be completed in September 2018, thus fully achieving the original project scope. Institutions (PERC, PETL) are well established with competent staff. ESPIP (expected to be approved by the Board in July 2017) will continue to strengthen the EUMP s development outcomes by consolidating institutional capacity, and reducing fiscal leakages in the distribution system. 61. A major design flaw of the original EUMP is that, since 2003, GEDCO no longer pays IEC, even indirectly through PENRA, thus all IEC sales to Gaza are paid through net lending (89% - averaging $117 million per year since 2007) and debt settlement (11%). Given the leadership rivalry between Fatah and Hamas, and the electricity crisis in Gaza (in winter, there are less than four hours of electricity per day), this situation is expected to continue. The project through its original design with no investments in Gaza or even with its limited additional financing of $2.5 million could not have had an impact on this issue. Despite this fact, the latest biannual IMF Report to the Ad Hoc Liaison Committee (August 2016), anticipates a reduction of net lending 26 from 11% of the PA s net revenues in 2015 to 7% in By comparison, in 2007, net lending from the electricity sector only accounted for 15% of the PA s net revenues. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Unsatisfactory 62. As summarized in Sections 2.1 and 3.1, overall, quality at entry was moderately unsatisfactory. This rating is also well aligned with the outcome rating of the project pre-restructuring (MU). 63. There were several flaws in the project s design as mentioned in Section 3.1, including (i) the PDO was beyond the ability of the sole project to achieve; and (ii) the M&E framework contained only one PDO level indicator, which is not good practice for designing a robust M&E framework. Including the Gaza share of net lending (averaging $117 million or 55% of the net lending from the electricity sector between 2007 and 2015) in the PDO was also a major design flaw: since 2003, GEDCO no longer pays IEC. The project activities were needed, but 90% of the funding was reliant on co-financing from other donors, with little possible leverage from the Bank. (b) Quality of Supervision Rating: Moderately Satisfactory 26 All sectors included: water, electricity, health, and sewage. The electricity sector has averaged about 63% of the net lending for the past four years. 24

39 64. The restructuring (focusing the project on the Bank financed components only) was justified, because with only 10% of the total project cost financed by the Bank, the original project design was relying on EIB and European 27 funding for two strategic physical investment components: the four HV substations, and the new feeders and the northern and southern distribution systems. It would however have gained to be carried out earlier, as it was finalized in September 2013, a few days before the original closing date. By that time, the Bank grant was already 81% disbursed, and the impact that the restructuring could have on the final overall outcome rating was lessened, as per the evaluation formula of the ICR guidelines for projects with formally revised objectives. 65. The Bank team, however, showed good overall supervision proactivity with an average of two missions per year. It was able to move fast to process and deliver an additional financing of $2.5 million to respond to an urgent situation after the 2009 Gaza War. It also showed high proactivity for solving safeguard issues. It addressed all non-compliance / complaint issues on time, and thoroughly, although this part of the project (the HV substations) had been removed from the scope of the revised project after the restructuring. 66. Realizing the need for restructuring the project along a revised PDO (different from a reduction in net lending), the Bank team proactively saw the importance of further understanding the complex issue of net lending, in order to maintain a constructive dialogue with Palestinian Energy Sector Institutions on this core sector issue. Before the preparation of the level-one restructuring, it therefore initiated the production of the Net Lending Report, finalized in November 2014, which was subsequently acknowledged by the client and by all donors as a reference document on the Palestinian Electricity Sector. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory 67. Overall Bank performance is rated moderately satisfactory, based on the ratings for quality at entry and for supervision, and on the overall outcome rating (MS). Indeed, as per ICR guidelines, when the rating for one dimension is in the unsatisfactory range while the rating for the other dimension is in the satisfactory range, the rating for overall Bank performance normally depends on the outcome rating (MS in this case). Thanks to the level-one restructuring made by the Bank team during implementation, a flawed project design was successfully improved and it yielded significant results. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 68. Overall, government performance was satisfactory. Government entities for this project refer to PENRA, PERC (established in 2010) and PETL (established in 2013). All the institutional and capacity building work was implemented well. Based on the TA work on renewable energy and energy efficiency, PENRA issued: (a) the general electricity law (2012); (b) the renewable energy and energy efficiency law; and (c) secondary legislations and regulations for renewable energy. PERC was launched through the project, and it has been operational for seven years. PETL was created on time to take over the substations and the connection points to Palestinian loads after the PPA signing. Government s (then PENRA before 2010) responsibility for the two year delay to agree on the terms of the contract for the substations is shared with EIB and IEC. PENRA was not in a 27 Originally EIB, then Spanish, and Italian - for the new feeders and the northern and southern distribution systems. 25

40 position of force to accelerate this agreement, and it depended on IEC s good will and on EIB s internal approval processes. EIB still had to go back to its Management Committee and Board to approve the restructuring of their original 45 million loan effective in 2005 to refocus it on the four substations, and to secure the internal approval of a 44.5 million single-source contract for the construction of the four substations by IEC. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory 69. The implementing agencies (PENRA, the DISCOs, PERC, and PETL) satisfactorily carried out the Bank financed activities. The PMU located in PENRA had a good knowledge of Bank procurement processes. However, during implementation, the PMU lacked strength in coordinating with the DISCOs key information/ data gathering on important project outcome indicators. In the course of implementation, the Bank requested reporting on key performance indicators related to the financial performance of the DISCOs, and it took time for the Bank to receive this information. The PMU should have been more proactive with the DISCOs and better coordinate the data gathering exercise. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 70. Overall borrower performance is rated moderately satisfactory, based on the ratings for quality at entry and for supervision. 6. Lessons Learned 71. Net lending is a complex issue. Before setting it as the original PDO, the Bank should have carried out a comprehensive analysis. The preparation of Bank operations should benefit from earlier analytical work in the sector. The 2007 West Bank & Gaza Energy Sector Review was good practice, but it did not cover enough the central sector issue of net lending. Since one of its goals was to help prepare the EUMP, it should have analyzed more in depth this issue, and uncover its main contributing factors, with a view to design the project more effectively. The Net Lending Report shows that net lending is caused by a range of issues (absence of a billing system, technical losses, electricity theft, non-payments by refugee camps and by local administrations, increased tariffs, local interests of the municipalities and village councils, high IEC s interest rates on non-payments, etc.), and that the project design could only directly affect part of the net lending problem for the four project s West Bank DISCOs that together account for about 75% of all IEC sales to the West Bank. Such a study could have recommended for example the inclusion in the Capacity Building and Technical Assistance Component of a web-based database between PENRA (and the DISCOs) and IEC to ensure the timely reconciliation and payment of invoices and to reduce the burden of IEC s interests on the debt. It would also have excluded Gaza from the PDO since GEDCO stopped all payments to IEC in The PDO and PDO level indicators should be realistic in fragile/ conflict context such as Palestinian Territories. Because of the Israeli Palestinian conflict, operating in Palestinian Territories is difficult. Development outcomes in the West Bank and Gaza are affected by fragility, conflict, and violence (FCV). This difficult situation accentuates the need to set realistic and achievable PDO and PDO level indicators. Also the PDO and PDO level indicators should be directly controllable by Palestinian project stakeholders, and allow for some flexibility to take account of uncertainties (such as possible wars in Gaza). 26

41 73. In an FCV context, it is important to have sector expertise on the ground, close to West Bank & Gaza in this case. During implementation ( ), the Bank s Energy Global Practice (GP) did not have a decentralized staff yet within close reach to West Bank & Gaza. Some issues could have been addressed faster with an expert on the ground who can discuss and address implementation issues jointly with the client as they arise. Thanks to having more presence on the ground, the team has achieved since then a good improvement in coordination, with an operation going to the Board in July 2017 (ESPIP), a programmatic TA under preparation, the preparation of the SED study, and close supervision of ongoing projects under implementation (especially in Gaza). If there is no decentralized staff, closer supervision missions should be recommended in an FCV context. 74. In an FCV context, it is all the more important to ensure and facilitate regular coordination between the parties involved in the project. In this project, implementation delays for the HV substations (especially that in Area C - Ramallah) occurred due to lengthy processes in land expropriation and/or design modifications during the construction phase and/or suboptimal coordination with/from Israeli authorities. For future projects, the client assessed that issues would gain be clearly addressed with IEC/ Israeli authorities ahead of time and roles and responsibilities defined for each party regarding land expropriation and the need for large areas to stage the HV electrical towers and the required access roads. Addressing these issues from the onset could substantially reduce the implementation time frame. When doing infrastructure projects in Palestinian Territories, for future occasions, the client and the Bank could therefore think about some form of coordination/ concertation with the Israeli side to help accelerate implementation in partnership with other donors. In conflict situations generally, if it is possible to integrate the two sides views of things and plans, then this can be valuable for project implementation. Finally, in FCV countries, it is important to take into account of conflict analysis, and include political economy considerations. 75. More efforts should be done to improve the situation of the electricity sector in Gaza. Gaza accounts for 40% of the population of Palestinian Territories, but for only 25% of overall electricity consumption. In 2015, it received 1,517 GWh of electricity (64% from IEC - for a population of 1.9 million), while the West Bank consumed 4,492 GWh (95% from IEC - for a population of 2.8 million). This is 798 kwh per person per year, twice less than in the West Bank (1604 kwh per person per year). This situation is especially acute during the winter when the load is at its peak and people get only 3 to 4 hours of electricity per day. More efforts should be done to improve the situation of the electricity sector in Gaza, while addressing also its financial sustainability. It is recommended that Gaza be dealt with separately from the West Bank as it has its own issues. During implementation, it was discovered that the Gaza share of net lending represents 55% of total net lending in the electricity sector and that GEDCO stopped all payments to IEC in 2003, thus rendering the project unaccountable for reducing the Gaza share of net lending. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 76. The borrower shared its own evaluation report in February 2017, and it is attached in Annex 8. The draft final ICR was shared with the borrower on March 3, 2017, and they did not have comments on the ratings and the analysis. (b) Cofinanciers 27

42 77. Cofinanciers were consulted during the preparation of the ICR. The Bank team preferred to wait for the internal review meeting (that took place on March 10, 2017) before sharing with them the ICR. No comments were received from cofinanciers on the ICR in March (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) None. 28

43 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Costs of the original EUMP as reported by the independent auditor, Mazars, in May 2016, and adjusted to reflect the latest disbursements of the World Bank grants; the full amount of the EIB loan ($54.8 million); and the $17.5 million soft loan from the Government of Italy to complete the second stage of subcomponents 2 (a) and (b). As in the PAD, this excludes the Value Added Tax (VAT) for the four high-voltage substations paid by MOF. Components Appraisal Estimate (USD millions) Actual/Latest Estimate (USD millions) Percentage of Appraisal Source of Funds Component 1 : Transmission % (a) Development of the four bulk supply substation % EIB & Norway Component 2: Distribution % (a) Development of the new Northern Distribution System served by the new 161 kv SIS % (b) Development of the new Southern Distribution System served by the new 161 kv SIS (c) Development of the new Central Distribution System served by the new 161 kv SIS % Italy & Norway Italy & Norway % World Bank (d) Rehabilitation of distribution systems (all utilities) % (e) Prepaid meters and AMR (all utilities) % Norway/ EC/ WB/ Govt AFD & Norway Component 3: Technical Assistance % (a) Capacity building (all utilities) % (b) Consulting Services for PENRA (renewable, energy efficiency, next stage of sector reform and auditing for PMU) (c) Consulting Services for project supervision (short and long term) % World Bank, Norway World Bank, AFD % EIB 29

44 Components Appraisal Estimate (USD millions) Actual/Latest Estimate (USD millions) Percentage of Appraisal Source of Funds (d) Operating Cost for PMU % Norway (e) Incremental costs for PENRA, PETL, and PERC % World Bank Total Baseline Cost % Physical Contingencies 11.2 n/a n/a Price Contingencies 4.1 n/a n/a Total Project Costs % (b) Financing Source of Funds Appraisal Estimate (USD millions) Actual/Latest Estimate (USD millions) Percentage of Appraisal Borrower % EC: European Commission % EC: European Investment Bank % FRANCE: French Agency for Development % NORWAY, Gov. of % Special Financing - WBG Trust Fund for Gaza and West Bank % ITALY, Gov. of n/a 17.5 n/a TOTAL % 30

45 Annex 2. Outputs by Component Original Project Note: NBF: Non-Bank Financed Components PAD At Project Completion Component 1: Installation of four-161kv substations in West Bank Ongoing and 75% completed -NBF Component 2: Development, reconfiguration and rehabilitation of distribution networks Development of four new bulk 161/33/22kV supply substations lines in the northern, central and southern areas of the West Bank as important part of the transmission system. Most of the existing connection points (33kV and 22kV and 400V) supplying the Palestinian loads by IEC will be replaced and supplied from the new reconfigured distribution system served under these new 161kV substations. (i/ a and b) Development of the new Northern and Southern Distribution Systems in the West Bank served by the new 161 kv substations. (i/ c) Development of the new Central Distribution System in the West Bank served by the new 161 kv substations. (ii) Rehabilitation and extension of distribution networks in all utilities in the West Bank and in Gaza. Supply of equipment/materials will be provided to all utilities for urgent network repairs. Utilities will use local contractors to implement the urgent needs. At closing on Sept. 30, 2016, three of the four substations were completed, totaling 360 MW. The fourth substation (in Ramallah, 180 MW) is 15% complete, and it is expected to be commissioned in July The three substations will be energized after the signing of the PPA between IEC and PETL that is expected to happen before the end June of Ongoing and partially completed -NBF The development of the Northern & Southern distribution systems was split into two stages: The first stage (completed) was financed by Norway with a cost of $3 million to procure the electricity distribution materials needed for the construction of the main outgoing feeders from the HV substations. The second stage (ongoing) is financed by Italy through a soft loan with a cost of $17.5 million and will be completed in September Completed (Bank Financed) Financed by the Bank ($3 million) for the cost of the goods and the implementation cost was covered by JDECO. JDECO installed 214 km of medium voltage cables for the reconfiguration of the central distribution system. Completed (partially Bank Financed) Rehabilitation of the distribution network in the West Bank has been completed utilizing materials and equipment worth $28.3 million financed by the European 31

46 Components PAD At Project Completion Commission and Norway. Repair of the damages in the electricity network in Gaza (completed): all contracts financed by the EU, Norway/ Sweden, and the World Bank for damage repair of electricity networks in Gaza have been executed (see the details further below). (iii) Installation of prepaid meters and Completed -NBF automatic meters reading systems in all utilities in West Bank and Gaza. About 140,000 pre-paid meters and 400 AMRs (Automatic Meter Reading) will be 244,600 prepaid meters were purchased (15,600 three-phase, and 229,000 singlephase) and deployed as follows: procured by the PMU and installed by 1. 25% in Central areas / JDECO, 41% the utilities. in Northern areas / NEDCO / TEDCO, 28% in Southern areas / HEPCO / SELCO, and 6% in Gaza / GEDCO % were deployed in 2012 and 63% in Component 3: Capacity Building and Technical Assistance (i) Capacity building for all the five utilities in the West Bank and Gaza. This will include technical assistance for procurement of tools, vehicles, IT hardware software and training. Completed (partially Bank Financed) Procurement of tools and vehicles (50 utility vehicles) for the electricity distribution utilities and the execution of the respective contracts are completed. (ii) Providing engineering consultancy services to PENRA for promoting and utilization of renewable energy resources and adopting energy efficiency measures, including the purchase of an energy efficiency lab. The WB&G is significantly endowed with renewable energy resources. Accordingly, this component would consist of resource assessment of all renewable energy resources, particularly solar, and facilitate the development of appropriate institutional and legal framework. Consulting services will also include the development of the next NEDCO was established in 2008, and was supported by Norway/ Sweden with a total budget of $3.4 million covering: - Start-up costs - ICT/MIS system - Technical Assistance Completed (partially Bank Financed) Renewable Energy: PENRA initiated the Palestinian Solar Initiative (PSI) and completed an assessment of different renewable sources in West Bank & Gaza. A Wind and Solar Atlas in West Bank & Gaza was produced. An assessment study on the potential for renewable energy development in the West Bank and Gaza was financed by the Bank and based on this, PENRA issued the Renewable 32

47 Components PAD At Project Completion stage of electricity sector reform and auditing services for the PMU. Energy Strategy which was approved by the Cabinet of Ministers. Energy Efficiency Completion of the Energy Efficiency Action Plan (NEEAP 28 ) which was approved by the Cabinet of Ministers. The energy efficiency lab was not implemented but the Bank financed an additional street lighting program (Pilot project to replace existing street lighting in 11 municipalities - see the summary at the end of the Annex). Completion of a market survey regarding Energy Efficient Goods and Existing Testing Laboratories in Palestinian Territories, conducting more than 34 comprehensive audits in different sectors (industrial, public, service, and household), and conducting a comprehensive EE awareness campaign (financed by AFD). (iii) Providing engineering consultancy services (short and long term) for procurement and construction supervision for implementation of the four new 161 kv substations and the related connecting 161kV lines as well as the development/reconfiguration of the distribution networks served by these substations in the Northern, Central and Southern areas. Based on this work, PENRA issued: The general electricity law (2012). The renewable energy and energy efficiency law. Secondary legislations and regulations for renewable energy Ongoing -NBF Technical assistance coordinated by the EIB and financed by the FEMIP TF (Facility for Euro-Mediterranean Investment and Partnership) for the transmission component of the Project - the construction of four 161/33 kv substations in the West Bank. Contract extended to December 2018 for the construction supervision of the Ramallah substation (expected to be completed in July 2018). 28 NEEAP Phase 1 (to 2020) was financed by AFD, and NEEAP Phase 2 (from ) was financed by the Bank under ESMAP. 33

48 Components PAD At Project Completion (iv) Operating cost of the PMU. This will include expenditures related to salaries, office rentals and supplies, vehicles, fuel, utilities etc. (v) Incremental costs for PENRA, PETL, and PERC. This included expenditures related to salaries, office rentals and supplies, vehicles, fuel, utilities etc. Additional technical assistance from Italy on the development/reconfiguration of the distribution networks served by these substations in the Northern, Central and Southern areas (ongoing). Completed -NBF Financed by Norway/ Sweden Completed (Bank financed) PERC was established in February 2010 with financial assistance of the Bank. PERC, after its establishment issued a unified tariff regulation and granted distribution licenses to JDECO and NEDCO. PETL was formally established on October 1, 2013: PETL prepared a business plan in PETL technical engineers completed a training conducted by IEC on operating the HV substations. PETL is negotiating with IEC a commercial agreement for power purchase (PPA). 34

49 Restructured Project (limited to the Bank financed elements) Component of the Original Project Activity Cost ($ million) 2 i/ c 214 km of MV cables for JDECO ii/ Additional financing for Gaza (see below) 2.50 Financed vehicles and tools for PETL/PERC/ NEDCO/HEPCO (GIS to HEPCO) 1.59 Training (the bulk of the training being on operating the future 3 i/ four high voltage substations that were being built by the EIB) Consultancy services for the assistance in the specs of IT hardware 0.40 and utility software (SELCO/ JDECO) Studies: (i) Consultancy services for renewable energy assessment; (ii) 3 ii/ assistance in preparing EMPs, ARAPs & Social Audit Reports for the 0.32 HV Substations; (iii) assistance in preparing audit reports Street lighting program 0.67 Incremental operating costs of PENRA, PETL, and PERC (salaries, travel, office equipment, furniture, vehicles, IT/ computers) v/ Financed a GPS for PETL 0.08 Communication/ awareness raising activities for PERC, PETL Awareness campaign on PERC s role in the West Bank and Gaza World Bank /additional financing for Gaza Cost ($ million) Add. Materials GAZA -NESCO S Supply of ABC cables PEA-S1 falcon 0.36 Supply of Cond. Cables lot 3 falcon 0.06 Supply of disconnector Switches - Lot Supply of Dist. Transformers S4 Al-Takamul 0.62 Supply of LV ABC cables Accessories S3- SATCO 0.31 Supply of sport utility vehicle EUMP PEA-WB/4Lot. Temeco 0.16 Supply of steel poles WB/S6 SATCO 0.23 WB/S5 supply of wooden Poles NESCO Summary of the street lighting program The street lighting program was very successful. According to PENRA, the demand for LED fixtures from municipalities largely exceeded the available budget. A final report was produced by the client. The client wanted a second phase of the project with Bank s support, but the Bank team insisted to look into other business models which could potentially bring private sector participation. Two humoristic videos were produced on PEC s Facebook page (see posts of November 11 and 12, 2015): 35

50 The two videos were broadcasted on national TV and used a Palestinian celebrity to raise awareness of the importance of energy efficiency. One of them showcases the LED fixtures. The Bank advised PENRA on the TORs for the videos following the example of popular initiatives from the Lebanese Energy Efficiency Center. 36

51 Annex 3. Special Annex on Net Lending and DISCOs Payment Performance Net lending refers to the indirect payments made by the PA to IEC through deductions by the Israeli Ministry of Finance on clearance revenues 29 collected on behalf of the PA. These deductions are made to cover portion of the unpaid electricity bills from Palestinian electricity distributors. Throughout this annex, net lending refers specifically to net lending from the electricity sector. At the time of the restructuring (September 2013), net lending had reduced by 25% from the appraisal baseline of 917 million NIS (or $240 million) to 692 million NIS. Net lending from the electricity sector ( ) 30, million NIS WB& G WB , , Aver The case of Gaza. Between 2007 and 2015, the Gaza share of net lending was relatively stable around 55% - almost always exceeding West Bank s - with an annual average of 450 million NIS ($117 million), and a maximum value of 602 million NIS ($156 million) in 2015, which represented 5.6% of the PA s net annual revenues (IMF). The PA (managed by the Fatah party in the West Bank) whom PETL reports to has no leeway on net lending in Gaza, managed by its rival party Hamas since Thus the project could not be held accountable for reducing the Gaza share of net lending, and could only reasonably be expected to help reduce the West Bank s share of net lending. Also, the inclusion of the Gaza share of net-lending in the original PDO was a major design flaw because, since 2003, GEDCO no longer pays IEC, even indirectly through PENRA, thus, since then, all IEC sales to Gaza are paid through net lending. Note: In the subsequent analysis, we therefore focus on the case of West Bank, and exclude net lending from Gaza because it should not have been included initially in the PDO target. The case of the West Bank. Between 2007 and 2013, the West Bank s share of net lending was relatively stable around 44% - with an annual average of 342 million NIS ($89 million): 11% below the 2007 baseline of 382 million NIS. The West Bank s net lending amount in 2013 (the year of the restructuring) was 308 million NIS ($80 million): 20% below the 2007 baseline. 29 Clearance mechanism: Mechanism through which indirect taxes are collected by Israel on behalf of the PA and normally refunded via clearance procedures which were agreed in the 1994 Oslo accords. 30 Source: for years : WB/PWC Net Lending Report; for years : Net lending deductions by connection point (PENRA/ MOF); 2007: World Bank PAD; : PMU annual report. 37

52 Actu Targ Aver From the above graph, the gap between the actual West Bank s net lending and the PAD s target grew between 2011 and 2013, and West Bank s net lending was four times more than its PAD s target for year 2013 (which was $20 million 31, or 77 million NIS). However, West Bank s electricity purchases from IEC grew very significantly between 2007 and 2013 by an average of 14.7% per annum (eg. they were multiplied by 2.3 in six years) primarily because of two factors: (i) an average 7.5% annual increase in power purchased from IEC (which went up from 2,494 GWh in 2007 to 3,849 GWh in 2013); and (ii) a substantial increase of 33% in the IEC tariff 32 from 0.33 NIS/kWh in 2010 to 0.44 NIS/kWh in This tariff increase occurred around West Bank being 95% reliant on IEC (which is thus in a quasi-monopolistic position) for its power supply, the project cannot be held accountable for the impact that this unilateral tariff increase had on the rise of West Bank s net lending, and for the high net lending chunk that is observed in It is interesting to note that despite this very significant increase in West Bank s electricity purchases from IEC (in million NIS), West Bank s net lending averaged 342 million NIS ($89 million) between 2007 and 2013: 11% below the 2007 baseline. However, more interestingly, when looking at the ratio of West Bank s net lending to IEC purchases between 2007 and 2013, one can see an improvement in West Bank s payment discipline of IEC s bills: Purc Mill NIS) NL/ Pur (%) % % % % % % % Aver % 31 The PAD s targets for West Bank s net lending are found in page 52 of the PAD. 32 See WB/PWC Net Lending Report, p

53 The ratio of West Bank s amount of net lending to IEC purchases (in million NIS) indeed went from 44% at appraisal in 2007 to 16% at the time of the restructuring in times less as shown by the graph above, which compares the ratio of West Bank s net lending to IEC purchases (in %) for each year to its baseline value at appraisal (44%). Between 2010 and 2013, this ratio was 20% on average, so 2.5 times less than at appraisal (44%), which shows a notable improvement of the financial discipline of West Bank s DISCOs and municipalities in their payment of IEC s bills. The Net Lending Report (p. 25) shows that 87% of the net lending in the West Bank comes from the northern and southern areas that exclude JDECO. JDECO only accounts for 13% of the lending in the West Bank. The analysis on the underlying trends behind net lending s evolution in the West Bank therefore focuses on the northern and southern areas, and on their three main DISCOs: NEDCO, HEPCO, and SELCO 33. Four indicators are studied, which were also project s KPIs: (i) collection performance; (ii) collection rate x (1 - losses) ratio; (iii) accounts payable; and (iv) number of customers. This improvement in payment of IEC s bills would be due to a substantial increase in these three West Bank s DISCOs collection rates from 49% in 2007 to 77% in 2013 compensating by far their increased losses (that were up to 22% in 2011 before decreasing to 20% in 2015) % % % % % % % % % Average collection rate of the three West Bank s DISCOs 34 The collection rate x (1 - losses) ratio - indicating the actual share of electricity received by the DISCOs from IEC that was paid by end-consumers - went up from 41% in 2007 to 64% in 2013 and to 75% in JDECO, NEDCO, HEPCO, and SELCO together constitute 75% of West Bank s IEC purchases (in 2015). This analysis would gain to cover as well the municipalities and village councils, but they only account for 25% of West Bank s IEC purchases, and no data was collected on their financial performance since 2007 because they were not part of the project. 34 Weighted average between the three West Bank s DISCOs (NEDCO, HEPCO, and SELCO) based on size of sales. Source: for year 2007 (PAD); for years : PMU annual report; for years : ICR financial analysis. 39

54 Collection rate x (1 - losses) ratio of the three West Bank s DISCOs Accounts payable of the three West Bank s DISCOs have improved since 2010 to reach an average of 3.0 months in 2015 from a baseline value of 37.0 in Average accounts payable of the three West Bank s DISCOs (in months) This improvement is likely due to the prepaid meters (financed by other donors) installed under the EUMP original/ umbrella project and to the progressive establishment of West Bank s DISCOs (such as NEDCO) gradually taking over network areas formally managed by the municipalities/ village councils. Pre-paid meters Under the EUMP, 244,600 prepaid meters (15,600 three-phase, and 229,000 single-phase) were purchased and installed as follows: 25% went to JDECO; 41% to NEDCO and TEDCO; 28% to HEPCO and SELCO (and 6% to Gaza/ GEDCO). This was 75% more than planned at appraisal. By 2013, about 40% of West Bank s electricity consumers had a pre-paid meter. The future trend will be to install smart meters (under the followup ESPIP operation) on the largest consumers in the West Bank. Although more expensive than prepaid meters, smart meters offer significantly more functionality including remote monitoring and tampering detection, which are not possible with pre-paid meters. Since technical and non-technical 40

55 losses (theft) result in DISCOs not being able to bill for 20-30% of the electricity they purchase, this technology will significantly increase their cost recovery. Expansion of West Bank s DISCOs The number of consumers of the four main West Bank s DISCOs has grown by an average of 5.3% per year since 2007 (or by about 18,000 consumers per year) to reach 383,899 in 2013, which was above the original target. The four main West Bank s DISCOs have progressively taken over network areas formally managed by the municipalities/ village councils. In addition, a new DISCO (TEDCO) was licensed by PENRA in July 2016 with 18,545 customers and has a good overall performance. Number of consumers of the four main West Bank s DISCOs , , , , , , , , ,748 The latest biannual IMF Report to the Ad Hoc Liaison Committee (August 2016), anticipates a reduction of net lending 35 from 11% of the PA s net revenues in 2015 to 7% in By comparison, in 2007, net lending from the electricity sector only accounted for 15% of the PA s net revenues. 35 All sectors included: water, electricity, health, and sewage. The electricity sector has averaged about 63% of the net lending for the past four years. 41

56 Annex 4. Economic and Financial Analysis Economic Analysis The same economic evaluation approach carried out at the PAD stage is carried out at the ICR stage. The ICR Task Team was able to retrieve the excel files of the PAD stage economic analysis, and it used the same model to compare the expected EIRR and NPV (at 12 percent) at the PAD stage (respectively 23% and $83.8 million in 2008 prices) with the EIRR and NPV at the ICR stage. Economic costs and implementation schedule The actual economic costs of the project are summarized in the table below. These investment costs exclude Value Added Tax (VAT) and direct local taxes. Phasing of economic costs by service area (US$ million): Economic benefits The PAD s stage economic benefits of the project investments were: (a) reduction of West Bank s net lending; and (b) improvement in energy security. These benefits were to be measured as follows: (a) reduction of West Bank s net lending was the economic value of the expected improvements attributable to the project beyond a fixed $20 million annual reduction baseline; and (b) improvement in energy security was: the value of additional energy consumed as a result of the increased supply capacity, the tariff reduction brought by IEC s high voltage tariff (which is lower than IEC s flat tariff), and the reduction in technical losses from the investments and the institutional & technical measures implemented under the project. Since West Bank s net lending has averaged 373 million NIS (or $96.1 million slightly under the 2007 baseline value of $100 million) between 2008 and 2015, in consistency with the PAD stage analysis, no economic benefits are reflected in the ICR stage analysis for (a), although technically one could reflect an average benefit of $3.9 million per year. 42

57 The four HV substations will become operational after June 2017 (June 2017 for the first three, and July 2018 for the fourth one). After the signing of the PPA (planned for June 2017), a first tranche of 125 MW (or 35% of the capacity of the first three substations) is expected to be energized based on available feeders to evacuate the energy. Power evacuation will be increased to 100% once the new feeders and the distribution system financed by the Italian soft loan are completed in September When this happens, we estimate that about 75% of all power flows in the West Bank will originate from the HV substations and will benefit from IEC s high voltage tariff (which is 19% lower from IEC s flat tariff 36 ). As a result, an overall tariff reduction of up to 14% can be expected for future power purchases in the West Bank compared to the current situation, but the exact tariff reduction that will be reflected in the PPA is currently being negotiated by IEC and PETL. In this economic analysis, we present the detailed results for a 10% tariff reduction starting from 2018, and we discuss in the sensitivity analysis the cases of a 5% and a 15% tariff reduction. A large part of the benefits of the original EUMP project are the reduction in technical losses from the investments and the institutional & technical measures implemented under the project. The rehabilitation program of the West Bank s distribution systems under the project has been quite substantial (with investments of $28.3 million 7% more than envisaged in the PAD), and it has allowed the reduction of technical losses from a baseline value of 15% in 2007 to 12% 37 in 2011 and beyond, which is 1% below the PAD estimate of 13%. To remain conservative, we present the detailed results of the economic analysis for a reduction of technical losses to 12.5%. For the base case scenario (10% tariff reduction, 12.5% reduction of technical losses, and same WTP than at the PAD stage, e.g. 0.5 NIS/kWh in 2008 NIS 38 ), we find an EIRR of 29% and an NPV (at 12 percent) of $98.7 million (in 2008 NIS), which is higher than at the PAD stage. The detailed analysis and results for the 3 areas (Central, Northern, and Southern) are shown in the next three pages. All three areas have EIRRs above 22%. Overall, the benefits are split almost equally between tariff reduction (47% of the benefits in NPV), and technical loss reduction (53% of the benefits in NPV). A sensitivity analysis with the main parameter (tariff reduction) gives the following results: Base Case (10% reduction) 5% tariff reduction 15% tariff reduction Area EIRR NPV EIRR NPV EIRR NPV Central 87% % % 53.2 Northern 22% % % 29.4 Southern 22% % % 53.9 Total 29% % % The case of the PAD was a 4.3% tariff reduction and a reduction of technical losses to 13%. At the ICR stage, this scenario gives an EIRR of 20% and an NPV (at 12 percent) of $38.8 million (in 2008 NIS), which is still very high, but a bit lower than the PAD s EIRR of 23% and NPV of $83.8 million. The difference is due to the 6 to 7-year delay in using the HV substations NIS/kWh vs NIS/kWh (in 2015 NIS). 37 Point confirmed by PERC s Acting CEO in writing on December 12, Which translates to 0.7 NIS/kWh in 2015 NIS, and is consistent with the last household survey conducted as part of the World Bank s SED study. 43

58 Despite the delay in commissioning and energizing the HV substations, the benefits of the original EUMP project are still very significant, and they will ultimately depend on the tariff agreed between IEC and PETL in the PPA, expected to be signed in June

59 (All US$ amounts in the tables are expressed in 2008 price terms) Central Area / JDECO 45

60 Northern Area of West Bank (served by NEDCO, TEDCO, and municipalities/vcs) 46

61 Southern Area of West Bank (served by SELCO, HEPCO, and municipalities/vcs) 47

62 Financial Analysis Background: The Palestinian Energy and Natural Resources Authority (PENRA), was established in 1995 and its mandate was solidified based on the guidelines highlighted in the 1997 Letter of Sector Policy whose core elements included: i) rehabilitation of the network and extension to unserved areas, ii) separation of policy and regulatory entities from commercial activities, iii) establishment of a public transmission company, iv) creation of autonomous commercial distribution companies, v) development of a tariff that allowed full cost recovery, and more. As a result, six distribution companies (DISCOs) have been established to date, with five in the West Bank and one in Gaza. Outside of the six DISCOs, approximately 150 individual municipalities and village councils in the West Bank act as electricity service providers and represent approximately 25% of the total electricity consumption in the West Bank. In 1998, the Gaza Electricity Distribution Company (GEDCO) was established and it is the sole electricity distribution company (DISCO) in the Gaza Strip. In 2002, the Southern Electric Company (SELCO) was established, followed by Tubas Electric Distribution Company (TEDCO) in 2003, Hebron Electric Power Company (HEPCO) in 2006, and the Northern Electricity Distribution Company (NEDCO) in It should be noted that the Jerusalem District Electricity Company (JDECO) is the oldest energy institution in West Bank & Gaza and was established in Past Performance of JDECO ( ): Financial statements audited by Price Waterhouse Coopers (PWC) were received for Between 2011 and 2015, JDECO s annual purchase volumes increased, on average, by 4.1% per year, but their sales volume increased, on average, by 5.5% per year thanks to a declining trend in the system losses from 27.7% in 2011 to 23.9% in 2015 representing an average decrease of 1% per year. Past operational performance of JDECO Energy Purchased (GWh) 1,797 1,943 1,902 1,935 2,114 Energy Sold (GWh) 1,299 1,431 1,403 1,454 1,609 System Losses (%) 27.7% 26.4% 26.2% 24.9% 23.9% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Accounts receivable (months of sales equiv) Collections as % of billing 95.9% 96.6% 83.4% 95.0% 90.5% The purchase tariff jumped by 0.1 NIS/KWh between 2011 to 2012 due to the regional gas crisis pushing up the cost of purchased power by 32% over the previous year. The sales tariff rose in response but the operating revenues increased by just 26% in 2012 over the previous year. From 2012 to 2015, the cost of purchased power and the operating revenues increased in unison at an 48

63 average of 2.9%. The contribution margin (sales price less purchase price) was 0.22NIS/KWh in 2011 and declined to 0.18NIS/KWh by Originally, this margin was not enough for JDECO to recover its costs and as a result, the company experienced a net annual loss of 5 million NIS in 2011, which increased to 71 million NIS the year after and has remained high until The outstanding debt to JDECO by consumers is represented by the accounts receivable, which increased from 8.8 months of sales equivalence in 2011, to 12.6 months of sales equivalence in Past Financial Performance of JDECO Current Assets (mil NIS) ,055 1,126 Non-Current Assets (mil NIS) Total Assets (mil NIS) 1,114 1,333 1,613 1,835 2,017 Current Assets Ratio (%) 70.0% 71.1% 56.3% 57.5% 55.8% Equity (mil NIS) Current liabilities (mil NIS) ,015 1,166 1,399 Non-Current Liabilities (mil NIS) Total Liabilities (mil NIS) ,336 1,463 1,692 Total Equity & liabilities (mil NIS) 1,114 1,333 1,613 1,835 2,017 Current liabilities Ratio (%) 36.0% 41.9% 62.9% 63.6% 69.4% Equity Ratio (%) 28.8% 27.8% 17.1% 20.3% 16.1% In the financial statements of JDECO we see a declining current assets ratio signifying a liquidity squeeze. The company is expanding their non-current assets, including property, equipment and projects under construction even as the outstanding debt from consumers continues to grow. Past Performance of SELCO ( ): Financial statements were received for audited by Talal Abu Gazaleh. Unaudited/draft financial statements were received for Between 2011 and 2015, SELCO s annual purchase and sales volumes increased steadily while the very high system losses decreased from 37% in 2011 to 33% in Past operational Performance of SELCO Energy Purchased (GWh) Energy Sold (GWh) System Losses (%) 37.3% 29.5% 28.8% 14.6% 32.9% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Accounts receivable (months of sales equiv) Collections as % of billing 53.7% 58.7% 57.6% 70.8% 79.2% 49

64 Despite a high contribution margin (sales price less purchase price), starting at 0.28NIS/KWh in 2011 and ending at 0.30NIS/KWh in 2015, the income from operations is not enough to cover the utility s expenses. Being one of the smallest DISCOs in terms of number of consumers, SELCO suffers from a lack of economies of scale having to recover their growing O&M and overhead costs through a small customer base. As a result, SELCO experienced growing capital losses from 2011 until In 2015, thanks to lower IEC tariff rates, SELCO was able to register a net profit. SELCO s financial health will be improved if they merge with a larger DISCO, such as HEPCO, to benefit from economies of scale. Past Financial Performance of SELCO Current Assets (mil NIS) Non-Current Assets (mil NIS) Total Assets (mil NIS) Current Assets Ratio (%) 63.1% 63.7% 63.8% 68.3% 65.7% Equity (mil NIS) Current liabilities (mil NIS) Non Current Liabilities (mil NIS) Total Liabilities (mil NIS) Total Equity & liabilities (mil NIS) Current liabilities Ratio (%) 6.8% 4.9% 8.3% 8.6% 12.9% Equity Ratio (%) 3.3% -3.0% -13.6% -12.2% -10.0% According to SELCO s balance sheet, approximately 75% of the current assets are made up of shareholder s net receivables. Current liabilities ratio is increasing year over year because the accounts payable, for debt to IEC is increasing from 12 million NIS in 2011 to 37.8 million NIS in Past Performance of HEPCO ( ): Unaudited financial statements were provided for as part of HEPCO annual reports. Between 2011 and 2015, HEPCO s annual purchase volume increased by an average of 3.2% while the sales increased by an average of 3.8%. System losses are seen to be gradually declining at an average rate of 0.4%. Past operational Performance of HEPCO Energy Purchased (GWh) Energy Sold (GWh) System Losses (%) 22.0% 18.7% 19.9% 19.4% 20.4% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Accounts receivable (months of sales equiv) Collections as % of billing 74.0% 74.0% 70.0% 82.0% 90.0% 50

65 The contribution margin (sales price less purchase price), starts at 0.17NIS/KWh in 2011 and stays relatively constant throughout the period under consideration. The income from operations is just enough to cover operations costs. As a result, annual income is positive in most years with small losses seen in 2012 and Although the financial statements show that HEPCO is able to meet its costs with its operating income, the numbers don t show the impact of poor collection. HEPCO has large accounts receivable at 23 months of sales equivalence in 2011 which keeps relatively constant up to HEPCO s collection rates start low in 2011 at 74% and begin increasing by Past Financial Performance of HEPCO Current Assets (mil NIS) Non-Current Assets (mil NIS) Total Assets (mil NIS) Current Assets Ratio (%) 75% 77% 78% 79% 79% Equity (mil NIS) Current liabilities (mil NIS) Non Current Liabilities (mil NIS) Total Liabilities (mil NIS) Total Equity & liabilities (mil NIS) Current liabilities Ratio (%) 74% 78% 80% 75% 76% Equity Ratio (%) 23% 18% 16% 20% 20% HEPCO seems to be relatively financially stable; however, the financial statements that were provided were not audited by an independent firm. Past Performance of GEDCO ( ): Unaudited financial statements were provided only for The statements contained insufficient information and were lacking detailed notes to back-up the states data. The financial statements were not provided despite numerous requests. It is difficult to obtain accurate and reliable data from GEDCO as their finances are entangled in heavy political debate. Between 2011 and 2015, GEDCO s annual purchase volume declined by an average of five percent per year and no additional power was supplied from IEC, the Gaza Power Plant (GPP) or Egypt. In the same period, the sales to consumers decreased by an average of 3% per year. System losses, made up of technical and non-technical losses, held steady between 2011 and 2013 at an average of 30% and began to show signs of improvement in 2014 and

66 Past operational Performance of GEDCO Energy Purchased (GWh) 1,763 1,642 1,730 1,385 1,432 Energy Sold (GWh) 1,234 1,149 1,211 1,018 1,056 System Losses (%) 30.0% 30.0% 30.0% 26.5% 26.2% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) NA NA NA Accounts receivable (months of sales equiv) NA NA NA Collections as % of billing % 64.0% 75.0% 64.0% 65.0% The contribution margin (sales price less purchase price), starts at a very low 0.10NIS/KWh in 2011 and declines to -0.07NIS/KWh in 2015 meaning that the unit sales price was actually lower than the unit purchase price in that year. It should be noted that the average purchase price takes into account the cost of power purchased from IEC, Egypt and GPP (including capacity charge and fuel costs). The cost of purchasing power increased by an average of 4% per year between 2011 and 2015 with the largest increases happening between 2011 (when the regional gas crisis following the Arab Spring in 2011 pushed up the cost of power production) and 2014 (when tunnels importing diesel fuel from Egypt for GPP were closed forcing GPP to turn to Israeli diesel which is significantly more expensive). Diesel fuel made up, on average, 73% of the total cost of GPP power production between 2011 and 2015 and 35% of the overall cost of power supply for Gaza. The average cost of fuel in this period was 293 million NIS/year. The revenues from selling power have declined by an average of 4% per year between 2011 and 2015 due to declining sales volumes, increasing losses and sales tariffs which do not accurately reflect the needed rates for cost recovery. GEDCO s income statement shows that the company incurred losses of 81 to 85 million NIS per year in 2014 and Past financial performance of GEDCO Current Assets (mil NIS) 3,951 4,206 Non-Current Assets (mil NIS) Total Assets (mil NIS) 4,073 4,339 Current Assets Ratio (%) 97.0% 96.9% Equity (mil NIS) Current liabilities (mil NIS) Non-Current Liabilities (mil NIS) 4,218 4,519 Total Liabilities (mil NIS) 4,321 4,662 Total Equity & liabilities (mil NIS) 4,073 4,339 Current liabilities Ratio (%) 2.5% 3.3% Equity Ratio (%) -6.1% -7.4% 39 The collection rates stated in this analysis come from GEDCO but are likely inflated. Obtaining accurate and verifiable collection rates and financial statements is very difficult given the heated political climate of Gaza where electricity is one of the central points of argument between the Fatah and Hamas political parties. 52

67 GEDCO s current liabilities ratio is extremely low because they include approximately 4 billion NIS of debt to the PA in the non-current liabilities. Past Performance of NEDCO ( ): Financial statements were provided for audited by Ernst and Young. The 2015 financial statements were not provided despite numerous requests. Between 2011 and 2015, NEDCO s annual purchase volume increased by an average of 7.3% while the sales increased by an average of 7.9%. System losses, which are already quite low relative to other DISCOs, are seen to be gradually declining at an average rate of 0.5%. Past operational Performance of NEDCO Energy Purchased (GWh) Energy Sold (GWh) System Losses (%) 18.6% 17.3% 12.5% 13.5% 16.6% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) NA Annual income/loss before tax (mil NIS) NA Accounts receivable (months of sales equiv) NA Collections as % of billing 79.0% 70.0% 86.7% 86.5% 98.4% The contribution margin (sales price less purchase price), starts at 0.21NIS/KWh in 2011 and rapidly declines to 0.08NIS/KWh. NEDCO has positive net income year after year thanks to low losses and minimal overhead. NEDCO is the most financially stable and streamlined DISCO in the West Bank and Gaza with relatively small accounts receivable as compared to other DISCOs. Their collection rates have been increasing over the years. Past Financial Performance of NEDCO Current Assets (mil NIS) NA Non-Current Assets (mil NIS) NA Total Assets (mil NIS) NA Current Assets Ratio (%) 33% 42% 50% 45% NA Equity (mil NIS) NA Current liabilities (mil NIS) NA Non-Current Liabilities (mil NIS) NA Total Liabilities (mil NIS) NA Total Equity & liabilities (mil NIS) NA Current liabilities Ratio (%) 32% 43% 50% 45% NA Equity Ratio (%) 68% 50% 43% 46% NA 53

68 NEDCO s current assets ratio is increasing due to higher accounts receivable year over year. Current liabilities ratio is increasing due to higher accounts payable (debt to supplier) but also higher outstanding debt owed to the MOF recorded under other current liabilities. Total equity remained relatively constant over the years. Past Performance of TEDCO ( ): Financial statements were provided for audited by Jamal Abu Farha. Between 2011 and 2015, TEDCO s annual purchase and sales volumes both increased by an average of 10% while the system losses, which were already quite low relative to other DISCOs, declined by an average of 0.2%. Past operational Performance of TEDCO Energy Purchased (GWh) Energy Sold (GWh) System Losses (%) 16.7% 16.1% 14.1% 15.4% 16.1% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Accounts receivable (months of sales equiv) Collections as % of billing 97.0% 105.0% 97.0% 84.7% 76.3% The contribution margin (sales price less purchase price), starts at 0.13 NIS/KWh in 2011 and stays relatively constant. TEDCO s operating revenues are just barely enough to cover its costs resulting in almost zero total income per year. TEDCO has relatively low accounts receivable compared to other DISCOs and high collection rates in the initial years. TEDCO is a relatively efficient company given its small size. Past Financial Performance of TEDCO Current Assets (mil NIS) Non-Current Assets (mil NIS) Total Assets (mil NIS) Current Assets Ratio (%) 67% 71% 77% 87% 79% Equity (mil NIS) Current liabilities (mil NIS) Non Current Liabilities (mil NIS) Total Liabilities (mil NIS) Total Equity & liabilities (mil NIS) Current liabilities Ratio (%) 50% 59% 68% 82% 69% Equity Ratio (%) 49% 38% 30% 17% 28% TEDCO s current assets ratio is increasing because TEDCO kept collected revenues in a bank account instead of paying IEC. At the same time, TEDCO s accounts payable, which represents their outstanding debt to IEC, is growing year over year showing increasing current liability ratio. As of 54

69 2015, this issue has been resolved and TEDCO began paying IEC and settled past net lending issues with the government. Methodology for forecasting financial projections of DISCOs: Financial projections for DISCOs are calculated for The projections are based on the current tariff situation, not reflecting the future tariff reduction of IEC electricity sales (following the energization of the HV substations) that will be reflected in the PPA currently being negotiated by IEC and PETL and which is expected to be signed in June The analysis therefore constitutes a conservative scenario. Where possible, data and assumptions are used from an ongoing study titled Securing Energy for Development (SED) in West Bank and Gaza. The goal of the study is to provide recommendations for the investments required to create a sustainable and secure future energy sector. The planning model of the study compares a status quo scenario, which is the scenario under which currently planned projects are implemented but not much else, against various options for upgrading the energy sector. In the financial analysis of this Annex, the assumptions of the status quo scenario are used where necessary. It should be noted that the SED study is not yet finalized so all data and methodologies used here may change in the final SED report. For the West Bank, there is currently 850MW of existing capacity with additional capacity expected to come online in the first quarter of 2017 thanks to the energization of a new high voltage substation in Jenin (approximately 40MW). Throughout 2017 and 2018, three additional high voltage substations (in Nablus, Hebron and Ramallah) are expected to be energized which, combined, will provide an additional 540MW of capacity for the West Bank. According to the SED study, the 2016 peak load was estimated to be 820MW and the 2017 peak load 843MW. Therefore, there are no supply restrictions expected in the West Bank within the timeframe and consumers will continue to have access to electricity 24 hours per day. As a result, in the analysis below, the purchased energy follows the 4% load growth estimate from the SED study. For Gaza, the available supply is not enough to meet the demand. In fact, during normal, non-peak conditions, approximately 50% of the demand is met by the available supply which consists of 120MW of imports from Israel, 20-30MW of imports from Egypt and between 30-60MW of local generation at the Gaza Power Plant (GPP). Currently, GPP is running on diesel which makes its power 3 times more expensive that the imported power from IEC. In the future, there are plans to convert GPP to run on natural gas which would significantly reduce the cost of power generation. There are also plans to construct a new 161kV high voltage power line to Gaza to import an additional MW of power. In the SED study, we assume gas will be delivered to Gaza between and the 161kV line will not be available earlier than Both of these additional supply options will not be available within the timeframe of our analysis. Therefore, in the calculations below, we assume purchased energy in Gaza grows at zero percent between 2016 and The projected losses and collection rates in the analysis below follow a linear trajectory to reach the targets of the SED study in which losses equal 16% and collection rates equal 95% by 2030 for all DISCOs. The financial health of the DISCOs in the future depends on the sales tariff. In the analysis below, the sales tariff is set to the equilibrium tariff as currently defined in the SED study (definition and methodology may change in the final study). The equilibrium tariff is determined by the revenue requirement of the DISCO, comprised of the cost of energy purchase, O&M, 55

70 depreciation etc, divided by the total kilowatt-hour sales of the DISCO. If this sales tariff is set properly, the companies should not see losses at the end of the year. As secondary litmus test for the financial health of the company, the projected sales tariff is compared to the average sales tariff to see how much the company will have to raise its tariff by to be profitable. If the percentage increase is small, the company is already financially stable; however, if the percentage is large, the company has a far way to go. Projections for JDECO ( ): JDECO purchases are expected to increase at 4% per year, with losses decreasing by 0.5% per year (2030 target: 16%) and collection rate improving by 0.2% per year (2030 target: 95%). Projected operational performance of JDECO Energy Purchased (GWh) 2,198 2,286 2,378 2,473 2,572 Energy Sold (GWh) 1,685 1,765 1,848 1,935 2,025 System Losses (%) 23.3% 22.8% 22.3% 21.8% 21.2% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Increase as compared to avg 9.7% 12.0% 11.2% 10.7% 9.9% Total Operating Revenue (mil NIS) 1,118 1,195 1,243 1,295 1,347 Cost of Power Purchase (mil NIS) ,023 1,073 O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Collections as % of billing 92.4% 92.6% 92.8% 93.0% 93.2% In order for JDECO to have a healthy financial bottom line, and a positive income at the end of the year, the sales tariffs need to increase by 10-12% above the average sales tariff which is reasonable. Projections for SELCO ( ): SELCO purchases are expected to increase at 4% per year, with losses decreasing by 1.1% per year (2030 target: 16%) and collection rate improving by 2.1% per year (2030 target: 95%). Projected operational Performance of SELCO Energy Purchased (GWh) Energy Sold (GWh) System Losses (%) 31.8% 30.7% 29.5% 28.4% 27.3% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Increase as compared to avg 41.2% 41.0% 37.8% 34.7% 31.9% Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Collections as % of billing 66.1% 68.1% 70.2% 72.3% 74.3% 56

71 In order for SELCO to have a healthy financial bottom line, and a positive income at the end of the year, the sales tariffs need to increase by 32-41% above the average sales tariff. This increase is not feasible meaning that the institutional setup of SELCO is not currently cost effective. Projections for HEPCO ( ): HEPCO purchases are expected to increase at 4% per year, with losses decreasing by 0.3% per year (2030 target: 16%) and collection rates improving by 1.1% per year (2030 target: 95%). Projected operational Performance of HEPCO Energy Purchased (GWh) Energy Sold (GWh) System Losses (%) 20.1% 19.8% 19.5% 19.2% 18.9% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Increase as compared to avg 1.1% 3.5% 3.1% 2.8% 2.5% Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Collections as % of billing 79.1% 80.3% 81.4% 82.5% 83.7% In order for HEPCO to have a healthy financial bottom line, and a positive income at the end of the year, the sales tariffs need to increase by only 1-3%. This shows that the company is already operationally stable; however, it is important to note that the financial statements received from HEPCO were not audited. Projections for GEDCO ( ): GEDCO purchases are expected to increase at zero percent per year, with losses decreasing by 1% per year (2030 target: 16%) and collection rates improving by 2% per year (2030 target: 95%). Projected operational Performance of GEDCO Energy Purchased (GWh) 1,590 1,590 1,590 1,590 1,590 Energy Sold (GWh) 1,184 1,195 1,205 1,216 1,227 System Losses (%) 25.6% 24.9% 24.2% 23.5% 22.8% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Increase as compared to avg 53.3% 57.5% 56.0% 58.0% 54.3% Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Collections as % of billing 67.0% 69.0% 71.0% 73.0% 75.0% 57

72 Given GEDCO s current sources of power supply, they will have to increase their tariff by 50-60% in order to fully recover their costs, which will be difficult to do considering the large accounts receivable (outstanding debt from consumers to GEDCO) as well as large non-current liabilities (outstanding debt from GEDCO to the PA). Low collection is a fundamental problem in Gaza; however, power supply options also play a major role. In Gaza, the average cost of power is, in fact, more expensive than in the West Bank because power from GPP is approximately 3 times more expensive than power from Israel. To improve the financial health of the organization, more cost effective power supply options must be considered in addition to improvements in collection rates. Projections for NEDCO ( ): NEDCO purchases are expected to increase at 4% per year, with losses decreasing by 0.3% per year (2030 target: 16%) and collection rates improving by 0.7% per year (2030 target: 95%). Projected operational Performance of NEDCO Energy Purchased (GWh) Energy Sold (GWh) System Losses (%) 16.3% 16.0% 15.7% 15.4% 15.1% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Increase as compared to avg -9.2% -6.1% -5.9% -5.6% -5.3% Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Collections as % of billing 84.8% 85.6% 86.3% 87.0% 87.7% Unlike all other DISCOs, the average billing rate required to reach financial equilibrium at NEDCO is lower than the average billing rate of This shows that the company is financially sound and the tariffs that are charged to customers are adequate to cover costs. Projections for TEDCO ( ): TEDCO purchases are expected to increase at 4% per year, with losses decreasing by 0.3% per year (2030 target: 16%) and collection rates improving by 0.2% per year (2030 target: 95%). Projected operational Performance of TEDCO Energy Purchased (GWh) Energy Sold (GWh) System Losses (%) 15.8% 15.6% 15.3% 15.0% 14.7% Average Purchase Rate (NIS/KWh) Average Billing Rate (NIS/KWh) Increase as compared to avg 7.8% 11.1% 11.3% 11.5% 11.7% Total Operating Revenue (mil NIS) Cost of Power Purchase (mil NIS) O&M expenses (mil NIS) Annual income/loss before tax (mil NIS) Collections as % of billing 92.2% 92.4% 92.6% 92.8% 93.0% 58

73 With a moderate 8-12% increase in the billing rate, TEDCO will be able to recover its costs and have net positive annual income. Assumptions: In the West Bank, the system is assumed to be unconstrained from with supply that can increase freely in proportion to demand. Based on the SED assumptions the demand in the West Bank will grow at 4%, therefore, the purchased energy is assumed to follow the same trend. The import quantities and cost from Jordan between are taken from the status quo scenario of the SED study which aims to show what the future Palestinian energy sector will look like if there are no significant changes. In Gaza, the energy system is very constrained. Between , total energy purchases in Gaza grew at an average of zero percent. According to the SED study, no additional power supply is expected in Gaza before 2022; therefore, it is assumed that Gaza continues to remain constrained between Projected purchases from IEC, GPP and Egypt are taken as the average purchased quantity from The projected cost of power purchased from GPP and Egypt are taken from the status quo scenario of the SED study. The actual IEC tariff for 2016 was 0.386NIS/KWh (high voltage flat tariff excluding VAT). For 2017, the tariff has been increased by 4.6% (based on an announcement by the PUA) and from 2018 onwards the tariff is assumed to increase at 1% per year. This is a conservative tariff as the PPA with IEC is expected to offer a lower tariff. The PPA is expected to be finalized by Mar Since losses are calculated as billed energy, in KWh, divided by purchased energy, in KWh, the trend is linear and it can be assumed that each year losses can be improved by a fixed fraction over the previous year. Forecast of Losses Actual Forecast Forecast Forecast Forecast Forecast Target JDECO 23.9% 23.3% 22.8% 22.3% 21.8% 21.2% 16% SELCO 32.9% 31.8% 30.7% 29.5% 28.4% 27.3% 16% HEPCO 20.4% 20.1% 19.8% 19.5% 19.2% 18.9% 16% GEDCO 30.4% 29.4% 28.5% 27.5% 26.6% 25.6% 16% NEDCO 16.6% 16.3% 16.0% 15.7% 15.4% 15.1% 16% TEDCO 16.1% 15.8% 15.6% 15.3% 15.0% 14.7% 16% Since collection rates are calculated as the collection from sales, in NIS, divided by billed sales, in NIS, the trend is not necessarily linear because: i) bills from previous payment periods can be paid in the future (which can show collection rates over 100% in a given time period), and ii) at times the government does not pay for its electricity bills as compensation for payments to IEC through net lending. In fact, in 2015, the government settled outstanding debt with all DISCOs which is the 59

74 reason why the 2015 collection rates are different from previous years trends. For this reason, projected collection rates are set to increase at a fixed rate over the average collection rates as opposed to the 2015 collection rate. Forecast of Collection Rates Actual Average Forecast Forecast Forecast Forecast Forecast Target JDECO 90.5% 92.3% 92.4% 92.6% 92.8% 93.0% 93.2% 95% SELCO 79.0% 70.2% 71.8% 73.5% 75.1% 76.8% 78.4% 95% HEPCO 90.0% 78.0% 79.1% 80.3% 81.4% 82.5% 83.7% 95% GEDCO 65.0% 66.6% 67.0% 69.0% 71.0% 73.0% 75.0% 95% NEDCO 98.4% 84.1% 84.8% 85.6% 86.3% 87.0% 87.7% 95% TEDCO 76.3% 92.0% 92.2% 92.4% 92.6% 92.8% 93.0% 95% Assuming O&M changes according to the growth in electricity (4% in West Bank and 0% in Gaza) less an efficiency factor of 2% (assuming DISCO s will have less overhead in time). 60

75 JDECO BALANCE SHEETS (figures in NIS excluding VAT) Current Assets Accounts receivable 511,543, ,638, ,513, ,051, ,313,285 Cash & Cash Equivalents 66,731,355 78,507,761 89,072,998 81,999,095 76,013,661 Asset inventory in warehouse 50,328,765 32,279,908 41,059,610 46,348,215 45,437,813 Work under implementation 147,115, ,841,628 NA NA NA Other current assets 3,493,216 7,661,401 18,406,544 15,083,321 10,010,723 Total Current Assets 779,212, ,929, ,052,489 1,055,482,372 1,125,775,482 Non-Current Assets Property Plant & Equipment 327,291, ,827, ,044, ,740, ,900,801 Projects under construction NA NA 257,407, ,497, ,373,720 Intangible Assets 50,000 50,000 50,000 50,000 50,000 Other non-current assets 7,130,789 22,717,324 32,248,657 43,470,784 46,554,248 Total non-current assets 334,472, ,595, ,750, ,758, ,878,769 Total Assets 1,113,684,434 1,332,524,798 1,612,802,780 1,835,240,965 2,016,654,251 Current liabilities Accounts Payable 285,831, ,908, ,953,033 1,027,225,379 1,255,331,424 Other current liabilities 115,593, ,281, ,567, ,247, ,390,312 Total Current Liabilities 401,424, ,190,194 1,014,520,666 1,166,472,606 1,398,721,736 Non-current Liabilities Long term loans 192,511, ,496, ,087,630 92,051,231 68,657,070 Provision for end of service 67,999,128 68,395,500 86,197,324 81,978,304 89,250,091 Deferred Revenue 127,381, ,957, ,982, ,558, ,182,770 Other allocation reserves 3,586,600 3,586,600 3,586,600 3,586,600 5,086,600 Total non-current liabilities 391,477, ,436, ,854, ,174, ,176,531 Equity Paid up capital 178,875, ,875, ,875, ,875, ,875,000 Treasury shares -3,879,311-7,666,691-1,486,709-3,622,230-3,622,230 Statutory reserve 9,187,500 9,187,500 9,187,500 9,187,500 9,187,500 Revaluation reserve 86,962,931 69,570,345 53,716,168 33,576,949 67,683,536 Retained earnings 49,635, ,932,409 36,135, ,576,791 72,632,178 Total equity 320,781, ,898, ,427, ,594, ,755,984 Total liabilities & equity 1,113,684,434 1,332,524,798 1,612,802,780 1,835,240,965 2,016,654,251 *Source: Annual Reports (all years audited by PWC) 61

76 JDECO INCOME STATEMENTS (figures in NIS excluding VAT) Operating Income Electricity Sales (billed) 694,862, ,140, ,860, ,714, ,052,263 Purchased Electricity -562,555, ,261, ,806, ,356, ,483,182 Gross Profit from sales 132,307,333 74,878,796 57,054,291 64,357,878 77,569,081 Subscriber's contribution to extension of services 35,149,206 22,703,391 68,183,242 54,921,120 55,149,003 Revenue from services 9,828,978 7,166,019 9,646,416 11,571,609 10,182,591 Total Operating Income 177,285, ,748, ,883, ,850, ,900,675 Operating Expenses General & Admin expenses -145,790, ,425, ,865, ,517, ,635,103 Depreciation Expenses -23,871,283-21,160,451-19,752,101-29,677,585-36,690,360 Provision for doubtful receivables NA NA -2,378,492-2,245,586-4,000,000 Provision for obsolete & damaged goods NA NA -1,508,245-1,508,245-1,815,124 Total Operating Expenses -169,662, ,586, ,504, ,948, ,140,587 Net Income/Losses before other income & expenses 7,623,477-64,838,110-51,620,060-74,098,192-87,239,912 Financing Expenses -21,769,450-33,838,017-28,076,247 15,225,873 10,827,836 Other income 8,993,026 27,270,860 4,725,648 5,217,910 2,191,500 Annual income/loss before income tax -5,152,947-71,405,267-74,970,659-53,654,409-74,220,576 Income Tax expense -2,589, ,791,446-7,658,068 Annual Income/Loss -7,742,387-71,405,267-74,970,659-56,445,855-81,878,644 *Source: Annual Reports (all years audited by PWC) 62

77 SELCO BALANCE SHEETS (figures in NIS excluding VAT) Current assets Cash and cash equivalents 3,183,063 9,114,211 5,435,813 16,670,961 11,389,588 Checks under collection 4,381,660 6,607,877 5,379,639 2,308,503 4,388,066 Stakeholders net receivables 128,539, ,283, ,385, ,881, ,715,066 Inventories 42,268,623 38,112,171 30,555,028 33,265,776 27,559,593 Prepaid payments and debit balances 4,403,698 5,548,385 9,511,609 13,917,083 23,312,365 Total current assets 182,776, ,665, ,267, ,043, ,364,678 Non-Current Assets Beit Ummar Municipality 6,892,635 6,892,635 6,892,635 6,892,635 6,892,635 Net fixed assets 86,856, ,515, ,259, ,602, ,986,851 Work-in-progress 13,109, ,611 4,385,403 9,405,428 0 Other ,602,317 3,382,006 Total non-current assets 106,858, ,934, ,537, ,502, ,261,492 Total assets 289,635, ,600, ,804, ,546, ,626,170 Current liabilities Accounts payable 11,928,801 5,054,300 15,598,036 16,196,681 37,843,068 Other current liabilities 7,671,467 10,503,416 11,557,674 17,974,835 18,323,477 Total current liabilities 19,600,268 15,557,716 27,155,710 34,171,516 56,166,545 Long-term liabilities Long-term loans 78,142,027 84,069,134 82,815,894 83,084,752 83,015,967 Severance allowances 2,817,115 3,334,956 4,695,549 4,646,758 5,563,625 Ministry of Finance 179,409, ,048, ,816, ,136, ,309,386 Total long-term liabilities 260,368, ,452, ,327, ,867, ,888,978 Total liabilities 279,969, ,010, ,483, ,039, ,055,523 Equities Paid-in capital 44,250 44,250 44,250 44,250 44,250 Statutory reserve 44,250 44,250 44,250 44,250 44,250 Voluntary reserve 1,869,495 1,869,495 1,869,495 1,869,495 1,869,495 Stakeholders receivables -31,065,858-40,474,211-57,391,364-46,594,927-61,433,602 Shareholders current account 41,522,376 41,522,376 41,522,376 41,522,376 41,522,376 Accumulative (loss) Statement B -2,748,372-12,416,014-30,767,935-45,378,534-25,476,122 Net equities 9,666,141-9,409,854-44,678,928-48,493,090-43,429,353 Total liabilities and equities 289,635, ,600, ,804, ,546, ,626,170 *Source: Financial statements ( audited by Talal Abu Gazaleh but draft/unaudited form) 63

78 Revenues SELCO INCOME STATEMENTS (Figures in NIS excluding VAT) Electricity Sales + Discount 48,333,776 55,906,513 53,766,667 76,048,100 67,230,123 Electricity Purchase -42,969,409-54,065,475-52,664,853-70,714,130-48,869,845 Operating expenses (Wages, rents, salaries, maintenance) -4,024,643-5,046,172-8,078,247-8,251,986-11,083,814 Installation services revenues 1,537,144 2,743,024 2,442,701 2,178, ,314 Other operating revenues 3,424,981 1,205,492 1,293,851 1,171,357 4,758,443 Total profit (loss) 6,301, ,382-3,239, ,104 12,902,221 Contributions in kind 131, , ,738 4,021,210 Currency differential -3,588, ,298 2,585,184-39, ,711 Total profit (loss) before administrative and general expenses 2,845,271 1,905, ,697 1,016,359 16,673,720 Expenses Administrative, general and operating expenses -4,009,067-4,216,934-10,058,292-6,555,902-7,412,130 Other expenses 2,180,286 1,566,260 1,914, ,531 6,909,898 Allowance -4,928,673-5,493,227-6,801,094-7,145,739-7,115,438 Financing costs -1,574,845-2,233,066-2,387,574-1,933,661-3,185,965 The provision for doubtful debts -502,135-1,196, , , ,797 Total expenses -8,834,434-11,573,591-17,672,183-15,626,958-11,026,432 Net income/loss of the year -5,989,163-9,667,642-18,326,880-14,610,599 5,647,288 Accumulative (loss) at the beginning of the year 2,225,724-2,748,372-12,416,014-30,767,935-45,378,534 Prior-years adjustments -19, , ,255,124 Net accumulative (loss) at the end of the year Statement A -3,782,642-12,416,014-30,767,935-45,378,534-25,476,122 *Source: Financial statements ( audited by Talal Abu Gazaleh but draft/unaudited form) 64

79 HEPCO BALANCE SHEETS (figures in NIS excluding VAT) , Current Assets Cash & Cash Equivalent 10,542,073 13,424,893 13,090,423 2,947,436 5,782,708 Checks Under Collection - Short Term 5,510,679 6,152,219 7,967,833 9,876,538 9,387,145 Accounts Receivables - Net 294,580, ,491, ,093, ,259, ,332,268 Inventory 28,680,295 39,868,393 30,765,489 30,762,287 29,994,661 Other Current Assets 3,073, ,321,385 8,942,093 5,902,513 Hebron Municipality Current Account 133,858, ,102, ,741, ,874, ,649,990 Total Current Assets 476,245, ,396, ,980, ,662, ,049,285 Long Term Assets Checks Under Collection - Long Term 1,423,064 1,364,601 3,007,089 6,761,154 11,181,157 Work in Process ,480,450 2,776,993 7,290,115 Properties, Fixed Assets NBV 128,520, ,103, ,096, ,789, ,973,496 Concession Rights 30,444,000 30,444,000 30,444,000 30,444,000 30,444,000 Total Long Term Assets 160,387, ,448, ,028, ,771, ,888,768 Total Assets 636,633, ,845, ,008, ,434, ,938,053 Liabilities & Owner's Equity Current Liabilities World Bank Loan - Short Term 661, ,135 1,029,203 1,805,633 3,419,999 Accounts payable + outstanding 466,273, ,898, ,710, ,763, ,371,638 Unearned Revenue 4,526,352 5,960,690 1,705,579 10,422,151 11,022,622 Other Current Liabilities 1,559,105 3,785,656 3,467,256 2,035, Total Current Liabilities 473,020, ,330, ,912, ,026, ,712,869 Long Term Liabilities Employees End of Service Benefit Provision 3,596,685 4,364,141 5,248,868 5,163,790 7,014,518 World Bank Loan - Long Term 9,381,319 8,640,322 8,299,574 7,181,005 6,450,622 Deferred Revenues - grants & in-kind donations 6,822,433 10,334,784 20,864,471 23,974,775 25,285,153 Total Long Term Liabilities 19,800,437 23,339,247 34,412,913 36,319,570 38,750,293 Total Liabilities 492,821, ,670, ,325, ,346, ,463,162 Owner's Equity Hebron Municipality Paid in Capital 152,745, ,745, ,745, ,745, ,745,000 Prior Period Adjustments - VAT Reconciliation -4,303,468 NA Prior Period Adjustments -8,339,560-5,448,532-8,933,325-20,569,506-23,062,166 Prior Period Adjustments - MoF 41,222,720 41,222,720 Reconciliation Accumulated Losses -8,236,760-14,044,297 Total Owner's Equity 143,811, ,175, ,682, ,087, ,474,891 Total Liabilities & Owner's Equity 636,633, ,845, ,008, ,433, ,938,053 *Source: Annual Reports (NOTE: above financial statements are not audited) 65

80 HEPCO INCOME STATEMENTS (figures in NIS excluding VAT) Revenues , , Electricity Sales 144,250, ,362, ,194, ,775, ,560,826 Add: Tariff Differences 9,352,890 21,979,208 9,700,234 9,854,794 9,612,348 Add: Fixed Charges NA NA NA 2,991,710 NA Deduct: Cost of Electricity Purchased -136,354, ,809, ,222, ,900, ,700,004 Gross Profit 17,249,543 21,532,292 10,671,816 16,721,584 29,473,170 Other Income Customer Participations 4,247,980 1,596,640 2,165,075 2,640,750 6,896,943 Other Operating Revenues 8,704,419 10,570,952 13,004,102 11,546,126 7,922,121 Accrued of Deferred Revenues 758, , , , ,000 Total Other Income 13,710,447 12,751,425 15,769,177 14,982,049 15,619,064 Total Operating Income 30,959,990 34,283,717 26,440,993 31,703,633 45,092,234 Expenses Operating Expenses -1,476,263-3,067,033-2,841,731-1,829,166-2,722,492 General & Admin Expenses -1,366,052-1,878,389-2,706,498-1,469,510-1,346,796 Payroll Expenses -10,037,633-12,013,416-12,983,957-11,912,764-12,358,333 Depreciation -9,002,162-8,797,369-9,207,810-10,251,450-9,762,652 Community Municipality of Hebron Contributions NA -231, ,414 NA -853,424 Loan Interest Expense -105,696 NA NA NA -195,000 World Bank Loan NA NA NA -170,000 NA Currency Differential Loss -539, ,016-15, , ,000 Bad Debt Expenses / Doubtful Receivables -1,000,000-11,472,400-1,000,000-3,000,000-6,000,000 Net Book Value of Assets Disposed NA NA NA NA -1,000,000 Other NA NA NA -927,688 NA Total Operating Expenses -23,527,510-37,580,237-28,933,653-29,660,578-34,338,697 Net Income 7,432,480-3,296,520-2,492,660 2,043,055 10,753,537 Source: Annual Reports (NOTE: above financial statements are not audited) 66

81 GEDCO BALANCE SHEET (figures in NIS excluding VAT) Assets Current Assets Cash and Cash Equivalents 6,389,609 2,197,965 Customers' Receivables 3,545,123,306 3,743,707,146 Materials and Supplies in Warehouses 14,635,146 24,182,036 Partners Current Accounts (Municipalities) 370,615, ,610,375 Receivables and Other Current Assets 14,697,288 35,880,987 Total Current Assets 3,951,460,803 4,205,578,509 Non-Current Assets Financial Assets at Fair Value 413, ,398 Property, Plant and Equipment, Net 116,354, ,062,881 Projects in Progress 4,374,270 10,707,531 Total Non-Current Assets 121,141, ,254,810 Total Assets 4,072,602,741 4,338,833,319 Liabilities and Shareholders' Equity Current Liabilities Payables and Other Liabilities 103,218, ,883,852 Banks Overdraft 0 13,195,769 Total Current Liabilities 103,218, ,079,621 Non-Current Liabilities Palestinian National Authority (PNA) 3,978,060,454 4,208,767,055 Canal Company for Electricity Distribution (Egypt) 100,122, ,475,280 Deferred Revenues 80,043,837 97,539,206 Sundry Provisions 59,569,735 61,649,421 Total Non-Current Liabilities 4,217,796,946 4,519,430,962 Total Liabilities 4,321,015,067 4,661,510,583 Shareholders' Equity In-Kind Capital (Electricity Distribution Network) 149,280, ,280,948 Revaluation Reserve - Electricity Network 50,011,980 50,0 11,980 Cumulative Change in Fair Value 6,030 76,950 Deferred Losses -1,156,470, ,711,284 This Year loss Prof- Exhibit (B) 708,759,437-74,335,858 Net Shareholders' Equity ,412, ,677,264 Total Liabilities and Shareholders' Equity 4, ,741 4,338,833,319 Source: GEDCO financial statements (unaudited) 67

82 GEDCO INCOME STATEMENT (figures in NIS excluding VAT) Operating Revenues from billed sales 509,181, ,553,841 Cost of Sale Cost of Energy Sold -383,614, ,186,153 Energy Lost (Not Billed) -127,853, ,671,379 Operating Expenses -3,299,263-5,540,937 Total Cost of Sale -514,767, ,398,469 Gross Profit -5,586,266-20,844,628 Deduct Depreciation of Electricity Network -12,500,915-13,152,821 Staff Costs -40,490,490-44,020,905 General and Administrative Expenses -13,817,427-13,678,708 Losses aggression -35,188,472-18, ,997,304-70,871,160 Add Realized Grants and Cash Donations 1,507,955 1,191,189 Realized Grants and In-Kind Donations 17,707,847 5,535,508 Other Revenues 2,882,112 3,823,384 22,097,914 10,550,081 Loss for the Year from Activities -85,485,656-81,165,707 Other Items: Prior Years Adjustments 794,245,093 6,829,849 Total Other Items 794,245,093 6,829,849 This Year loss Prof -Exhibit (A) 708,759,437-74,335,858 Source: GEDCO financial statements (unaudited) 68

83 Current Assets NEDCO BALANCE SHEETS (figures in NIS excluding VAT) Accounts receivable 48,714,506 97,809, ,280, ,961,956 Cash on hand at banks 11,223,360 24,619,157 23,092,885 23,137,898 Dues from municipal & village councils NA 56,036,239 80,236,793 70,964,603 Other current assets 52,200,611 22,194,384 37,580,642 19,153,316 Total Current Assets 112,138, ,659, ,191, ,217,773 Non-current assets Property & Equipment 230,296, ,445, ,628, ,864,378 Projects uner construction NA 1,037, ,256 3,331,636 Stock items NA 22,683,775 28,566,280 25,916,981 Total Non-current Assets 230,296, ,167, ,885, ,112,995 Total Assets 342,435, ,826, ,076, ,330,768 Current liabilities Accounts Payable 31,620,495 18,117,173 64,573,004 70,652,834 Other current liabilities 76,439, ,617, ,583, ,255,539 Total Current liabilities 108,059, ,734, ,156, ,908,373 Non-curent liabilities Provision for end of service 1,230,496 2,641,153 4,188,232 6,109,462 Deferred earnings NA 33,786,138 37,921,059 39,528,711 Other non-current liabilities 300,700 NA NA NA Total non-current liabilities 1,531,196 36,427,291 42,109,291 45,638,173 Equity Paid-up capital 15,251,594 17,231,440 17,231,440 17,231,440 Shareholder accounts 204,698, ,832, ,932, ,415,550 Statutory reserve 1,289,402 2,191,547 2,896,229 3,766,961 Optional reserve 1,289,402 2,191,547 2,896,229 3,766,961 Retained earnings 10,315,216 7,217,163 12,854,622 12,603,310 Total Equity 232,844, ,664, ,811, ,784,222 Total Liabilities & Equity 342,435, ,826, ,076, ,330,768 Source: Financial Statements audited by Ernst and Young (2015 financial statements not available) 69

84 NEDCO INCOME STATEMENTS (figures in NIS excluding VAT) Operating Income Electricity Sales (billed) + subscriptions + services etc 188,881, ,555, ,389, ,922,894 Electricity purchases + salaries & wages + depreciation -178,567, ,879, ,675, ,814,659 Gross profit / Operating Income 10,314,327 25,676,165 24,713,903 11,108,235 Operating Expenses General & Admin expenses -10,119,348-17,066,283-12,359,573-12,741,808 Depreciation -723,176-1,889,580-1,697,289-1,508,697 Provision for doubtful receivables -795,182 1,269, ,774-5,422,052 Other expenses -300,700 NA NA NA Total Operating Expenses -11,938,406-17,686,689-14,849,636-19,672,557 Net Income/Losses before other income & expenses -1,624,079 7,989,476 9,864,267-8,564,322 Revenue settlement with MoF ,865,770 Grant from PENRA 1,804,535 NA NA NA Other income 310,568 2,916,473 1,878, ,050 Annual profit before income taxes 491,024 10,905,949 11,742,966 15,460,398 Income tax expenses -399,893-1,884,496-4,696,143-6,753,083 Annual Profit after income tax 91,131 9,021,453 7,046,823 8,707,315 Source: Financial Statements audited by Ernst and Young (2015 financial statements not available) 70

85 TEDCO BALANCE SHEETS (figures in NIS excluding VAT) Current Assets Cash in bank 4,569,288 5,633,391 6,586,378 35,731,934 3,670,399 Checks 0 1,016,042 1,152,079 1,842,673 3,021,252 Accounts Receivable 18,974,046 22,267,521 25,261,915 33,723,803 40,106,657 other receivables 3,980,653 7,003,961 16,088,166 27,497,055 14,732,989 Accessories & spare parts in warehouse 809,865 1,535,601 1,488,859 1,669,365 1,959,394 Prepaid Expenses 141, , , , ,853 Total Current Assets 28,475,637 37,620,743 50,743, ,689,868 63,677,544 Fixed Assets 20,849,458 22,975,233 24,146,557 25,764,776 28,768,289 Fixed Asset Consumption -6,723,629-7,846,018-9,030,484-10,132,413-11,451,747 Net Fixed Assets 14,125,829 15,129,215 15,116,073 15,632,363 17,316,542 Total Assets 42,601,466 52,749,958 65,859, ,322,231 80,994,086 Liabilities and Equity Accounts Payable 11,608,119 30,917,332 43,164,091 92,984,000 55,848,851 Other Payables 9,498, ,712,992 1,931,121 0 Due Payments 7,133 1,202,011 41,373 5,500 9,500 Income Tax provision 65,103 65,103 65,103 65, ,664 Other Provisions 524, , ,586 1,237,181 1,611,351 Total Liabilities 21,703,727 32,939,598 45,940,145 96,222,905 58,042,366 Capital 15,361,808 15,361,808 15,361,808 15,361,808 15,361,808 Capital Reserve 5,374,958 5,374,958 5,374,958 5,374,958 5,374,958 Legal/statutory reserve 481, , , , ,796 Earning from previous years 663, Losses 0-320,687-1,408,066-1,309,997-1,147,997 Net Loss for the Year -983,778-1,087, , ,000 2,567,155 Total Equity 20,897,739 19,810,360 19,919,326 20,099,326 22,951,720 Total Liabilities & Equity 42,601,466 52,749,958 65,859, ,322,231 80,994,086 Source: Financial statements audited by Jamal Abu Farha 71

86 TEDCO INCOME STATEMENTS (figures in NIS excluding VAT) Revenues Electricity Sales - Pre paid ,539,822 20,048,480 21,065,333 Electricity Sales - mechanical counters 29,751,149 34,608,924 7,916,514 11,280,770 10,736,612 Electricity Sales - medium voltage 12,124,651 13,012,333 13,374,891 Electricity Sales - Street Lighting 1,135,804 1,228,366 1,045,340 Electricity Purchases -26,771,696-33,147,964-38,208,786-44,740,672-42,342,607 Gross Profit Electricity Sales 2,979,453 1,460, , ,277 3,879,569 Other Revenues Revenue from misc services 0 2,163,512 1,696,691 3,118,616 3,610,845 Government Support for Elec Production (Subsidy) 0 0 2,976,902 2,472,444 2,821,416 Income from transformer maint center 346, , , ,759 1,206,323 Total Other Revenues 346,075 2,989,242 5,475,250 6,364,819 7,638,584 Expenses Operating Expenses -2,781,780-3,159,127-3,210,182-3,985,514-4,801,092 General & admin expenses -887,262-1,768,156-1,906,374-2,305,516-2,561,213 Transformer main center expenses -640, , , , ,790 Total Expenses -4,309,306-5,537,581-5,874,289-7,014,096-8,093,095 Net profit from transformer maint center -294, ,432 43,924 50, ,533 Total Profit from elec sales (not including transf maint center) -689,589-1,302,811 65, ,307 2,949,525 Total Net Profit (including tranf maint center) -983,778-1,087, , ,000 3,425,058 Income Tax ,345 38, ,664 Statutory Reserve - 10% ,897 18, ,239 Net Profit after Taxes & Reserves , ,000 2,567,155 Source: Financial statements audited by Jamal Abu Farha 72

87 Annex 5. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Responsibility/ Specialty Lending Somin Mukherji Sr Financial Analyst AFTEG TTL Hayat Taleb Al-Harazi Operations Analyst MNARS Dominique M. Dietrich Language Program Assistant MNSSD Reinaldo Goncalves Mendonca Consultant EASNS John E. Besant-Jones Consultant MNSEG Zubair K.M. Sadeque Sr Energy Specialist GEE06 Meskerem Brhane Sr Urban Spec. EASIN Supervision/ICR Afaf Khalil Abbasi Procurement Specialist MNAPR Zeyad Abu-Hassanein Sr Water & Sanitation Spec. MNSWA Hayat Taleb Al-Harazi Operations Analyst MNARS John E. Besant-Jones Consultant MNSEG Meskerem Brhane Sr Urban Spec. EASIN Roger Coma Cunill Sr Energy Specialist GEE05 TTL Reinaldo Goncalves Mendonca Consultant EASNS Ahmed Merzouk Senior Procurement Specialist SARPS Somin Mukherji Sr Financial Analyst AFTEG TTL Suhair M. Saah Consultant MNAFM Husam Mohamed Beides Lead Energy Specialist GEE03 TTL Lina Tutunji Procurement Specialist GGO05 73

88 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY FY Total: Supervision/ICR FY FY FY FY FY FY FY FY FY FY Total:

89 Annex 6. Beneficiary Survey Results Not Applicable. 75

90 Annex 7. Stakeholder Workshop Report and Results Not Applicable. 76

91 Annex 8. Summary of Borrower's ICR and/or Comments on Draft ICR 1.1 Introduction The EUMP is a multi-donor electricity project which was designed, prepared and implemented as the umbrella program for the development of the Palestinian electricity sector. The project includes investment, institutional development and capacity building components. The EUMP was approved by the Bank on May 15, 2008, and became effective on September 30, The original closing date was September 30, 2013 and was extended to September 30, The Bank also approved in July 2009 the Gaza Emergency Response Additional Finance Program including US$2.5 million for the EUMP, which became effective on August 4, Program Objectives The overall development objective was to reduce the fiscal burden of the sector on PA s budgetary resources through lower deductions from clearance revenues for arrears owed to IEC. This will be possible through adoption of appropriate sectoral efficiency enhancement measures taken and the key performance indicators of the electricity distribution utilities that will include: (a) improved collection performance; (b) lower technical/non-technical losses; (c) reduction in payables to IEC on account of electricity purchase; and (d) consolidation and increase in the number of consumers. The Project will also ensure that NEDCO is fully operational through financing necessary capacity building measures. 1.3 Project Components These components are integrated into a coherent totality forming the proposed program. The next section describes the project and components forming the program. It also outlines the overall program goal and purpose, as well as the purpose of each project and component. The Project includes the following components: Component 1 Development of four new bulk 161/33/22kV supply substations and the related 161kV connecting lines in the northern, central and southern areas of the West Bank as important part of the transmission system. These substations will replace most of IEC s existing connection points (33kV and 22kV and 400V) that supply Palestinian load centers. The West Bank will then be supplied at IEC s high voltage tariff, which is lower than IEC s current flat tariff. The main achievements for this sub-component include the continuation of work on the four substations constructions and associated projects. Below are the details: 1. Jenin substation: 100% of civil works are completed. 100% of electrical installations completed. 2. Nablus substation: 100% of civil works are completed. 100% of electrical installations completed. 3. Ramallah substation: construction approval/permits have been received from the Israeli Civil Administration. 15% implementation progress. 4. Hebron substation: 100% of civil works are complete. 100% of electrical installations completed. Component 2: Distribution Component (i) Development of the new power distribution system in the northern, central and southern areas of the West Bank served by the new 161kV substation; (ii) Rehabilitation of distribution networks in all the electricity utilities of the West Bank and Gaza. This sub-component is financed by the EC, Norway/Sweden, World Bank and MOF / the utilities. The achievements during this report period are: Removal of Danger Rehabilitation Projects - NEDCO & JDECO have finished the implementation of the removal of danger projects. 77

92 - There are 14 projects conducted to remove the danger of the Electricity network in North West Bank, 10 of them located in Nablus, 3 in Jenin and one in Tulkarem, these projects includes the following: o Installation of 40 pcs of MV steel poles. o Installation of 19.5 km MV under grounded cables. o Installation of 13.8 km MV OHL Networks. - There are 8 projects conducted to remove the danger of the Electricity network in Middle of West Bank, most of these projects were completed except the following projects: o In TurmusAyya / Ramallah (Work was stopped due to Israeli Objection) o Al E badeya / JDECO Rehabilitation of Electricity Distribution Networks inside the Camps JDECO finished the rehabilitation of the electricity networks in Al Aroub Camp (iii) Installation of prepaid meters and automatic meters reading systems in all utilities of the West Bank and Gaza. The available resources of this subcomponent are 75% covered from a grant from the AFD and the remaining 25% are covered from a grant from Norway/Sweden to procure single phase prepaid meter and three phase prepaid meters in addition to the needed software, hardware, training and service agreement. PENRA deployed all prepaid meters to the utilities. The following table represents the number of meters that have been deployed in each region from Lot 1 and Lot 2. Table 1: Total Deployed Prepaid Meters in Lot 1 Items Single Phase Three Phase Contract Quantity JDECO TEDCO NEDCO HEPCO & SELCO GEDCO Others 169,000 33,799 4,549 31,632 34,958 11,000 46,391 15,600 3, ,870 3,350 1,000 4,152 Table 2: Total Deployed Prepaid Meters in Lot 2 Items Single Phase Contract Quantity JDECO TEDCO NEDCO HEPCO & SELCO GEDCO Others 60,000 10,015 5, ,000 10,000 13,985 Component 3 1. Capacity building for all electricity utilities in the West Bank and Gaza; this includes technical assistance for procurement of tools, vehicles, IT hardware and software and training. 2. Providing consulting services to PENRA for promoting the development and utilization of renewable energy resources and adopting energy efficiency measures. This component would assess the renewable energy resources of West Bank and Gaza, particularly solar, and facilitate the development of an appropriate institutional and legal framework. Consulting services will also include development of the second stage of the electricity sector reform and auditing services for the PMU. 78

93 This sub-component was financed from AFD (1 M EURO), World Bank ($1.2 MUSD) and Norway ($0.65 MUSD) and is comprised of two categories as follows: Category 1: Renewable Assessment and Drafting Renewable Regulations This category is financed by the World Bank and Norway. Category 2: Development of a Framework for Supporting Energy Efficiency Management The objective of this category is to contribute to the development of energy efficiency, renewable energy and environmental protection in key economic sectors of the Palestinian economy. The following highlights accomplished activities. Energy Audits The conducted audits cover different sectors including industry sector, agriculture, residential sectors and schools. The different sectors were selected according to the data collection about energy consumption and depending on demonstration project for revolving fund and bank loan for private sectors. Industrial Energy Audit An energy conservation study was performed for 3 factories in different cities in West Bank. The study s objective was to obtain an overview of the existing energy consuming systems related to lighting, boilers, motor loads, HVAC, air handling units, compressors, and office equipment. In order to determine the energy consumed by this factory, daytime walk-through were performed. Most factories characteristics and systems were discussed. The project team finalized in this stage about 5 factories; the following table shows the name of factories: Company Elite Factory Al-Jabrini Factory Future Company Table 3: Factory Energy Audit and Savings Building Energy Audit An energy conservation study was performed for twelve buildings in different cities in West Bank. The study objectives was to obtain an overview of existing building energy consuming systems related to lighting, boilers, motor loads, HVAC, Air handling units, compressors, water solar system and office equipment. In order to determine the energy consumed in these buildings, daytime walk-through were performed. Most building characteristics and systems were discussed. The following table shows the name of factories: Company Palestinian Technology College Rafidia Hospital Ministry of Works Ministry of Education Al-Mustakbal Al-Saleh School Jawaher School Villa Palestinian Towers Saint John Hospital Al-Thaheria Municipality Grand Park Hotel 79

94 PCBS Preventive Security Zahret Al-Mada n School Shwakeh School Al-Etihad Hospital Table 4: Building Energy Audit and Savings Revolving Fund Projects The aim of the revolving fund is to invest in energy efficiency solutions, which will reduce the energy bills paid by the MOF. Part of the savings would be transferred back to the fund, creating a revolving effect enabling investment in other future projects. - For Rafidia, Yatta and Ramallah hospitals, a revolving fund mechanism has been implemented. The initial investment for the implementation of EE action (Solar Water Heating system installation) in three hospitals (Public hospital) was financed by AFD. The savings generated by the investment, will be invested in another project in the future, to maximize the utility of AFD support and to allow the program to continue. - For PENRA s building, a revolving fund mechanism has been implemented. The initial investment for the implementation of EE action (Building Management System) in PENRA building (Public hospital) was financed by AFD. The savings generated by the investment, will be invested in another project in the future, to maximize the utility of AFD support and to allow the program to continue. - For Presidents Guard Sleeps Tender, a revolving fund mechanism has been implemented. The initial investment for the implementation of EE action (Building Management System) in PENRA s building (Public hospital) was financed by AFD. The savings generated by the investment, will be invested in another project in the future, to maximize the utility of AFD support and to allow the program to continue. EED teams measure the performance of the project and records the monthly savings or production of energy. EED teams calculate the amount saved from oil bills by MOF and requests MOF to transfer a percentage of this amount to the project s account within the Revolving Fund during 4 years until the Revolving Fund has been repaid by the project investment. Preparing the feasibility study for the street lighting project - Under the Electric Utility Management Project, the World Bank financed a pilot project to replace existing street lighting in 11 municipalities (Hebron, Jericho, Qalqilya, Nablus, Tulkarem, Salfeet, Jenin, Bethlehem, Ramallah, Al-Bireh and Tubas) and in National Parking. PENRA s EED has evaluated the feasibility of this project by assessing lighting performance, energy and power usage, economic and financial impact. - The project (street lighting) was implemented in August Preliminary Evaluation of the Refrigerator Replacement Project - About 27% of the electricity consumed in Palestinian homes is consumed in refrigerators. Electricity consumption in the domestic sector is around 50% of consumed electricity in West Bank & Gaza. Therefore, the proposal of replacing old refrigerators by efficient refrigerators in the residential sector was proposed to achieve the following objectives and targets: To reduce the consumption of electric power in the vital sector (domestic) in West Bank & Gaza. Developing the concept of recycling industries. Contributing to the reduction of greenhouse gas emissions and preserving the environment. Reducing PNA subsidies and losses corresponding to saved consumption. 80

95 Reduced electric power consumption will be reflected positively on future investments in infrastructure. Awareness campaign Several materials were design and prepared, such as: energy audit flyer, results of the fifteenth energy audit booklet, awareness perfume cards about saving energy in the transport sector, ten-minute film highlighting the success of the Revolving Fund BMS System, awareness painting competition for school students about energy conservation, stickers about switching lights off when leaving a room. 3. Providing engineering consultancy services (short and long term) to procure and supervise construction of the four new 161 kv sub-stations and the related connecting 161 kv lines and distribution development: - The consultant who will assist PETL in supervising the implementation of the substations project and the procurement of the NCC/SCADA system is recruited under a grant from EIB. - Hired consultant to assist with the development of Renewable Energy projects (7 10 MW) competitive bidding documents. 4. Operating cost of the PMU 5. Start-up operating costs for PETL and PERC. Project Monitoring Unit (PMU) The Project Monitoring Unit (PMU) was established in 2008 by the Palestinian Energy Authority (PENRA) and different donors agencies. The main objective of establishing this unit is to monitor and manage the main activities of national and international assistance in the energy sector. Moreover, this unit is responsible for preparing the procurement needs for different programs to comply with the guidelines of the donors. Among other responsibilities, the PMU has the following main duties: 1. Handles administrative responsibilities, including conferring with and representing PENRA in meetings with donors and commissions, various government agencies and the public; overseeing the preparation of periodic and special reports, providing financial approval of documents and preparing and delivering presentations. 2. Monitors day-to-day operations to ensure that projects meet goals and objectives, follow policies and procedures and provide services effectively and efficiently; takes corrective action as appropriate. 3. Prepares and administers the project s budget, including determining staffing and operational needs, approves and monitors PMU's expenditures. 4. Plans, organizes, administers, reviews and evaluates the work (professional and technical) for the projects. 5. Develops, monitors and updates the procurement plan for the activities identified under the project. 6. Prepares bidding documents and draft contracts for goods, works and non-consultant service contracts in accordance with the schedule in the procurement plans. 7. Reviews payments to suppliers and tracks receivables/payables; reviews reconciliation of accounts receivable/payable. 8. Prepares/reviews audit schedules for external auditors and answers their questions. Establishment of PETL: The Palestinian electricity sector including all of its institutions, facilities, and legal framework plays a pivotal role in the economy of Palestinian Territories. 81

96 Historically, the electricity transmission and distribution network in the West Bank was managed by the Israeli Electricity Corporation (IEC) and consistently caused transmission losses, which were considered among the highest in the region. These (technical and non-technical) losses are defined as the difference in the tariff categories between High-Voltage and Medium-Voltage levels, whilst, the consumption of the West Bank and Gaza strip for Year 2014 was around 7 GWh. We estimate that these losses cost the Palestinian Government an estimated 35 million dollars in 2014 this does not include annual losses incurred to the Palestinian government through the net-lending phenomenon. In light of such challenges, the Palestinian Government underlined the importance and need for the development of the electricity sector as one of the main key economic development policies for West Bank & Gaza. In one of the many important steps taken in the re-development of the electricity sector came the establishment of the Palestinian Electricity Transmission Ltd. (PETL) Company. Start-up operation costs of PETL were financed by the World Bank. PETL will incur operating expenses mainly resulting from employee salaries and logistics once phase 1 of the outgoing feeders/commercial agreement is complete. PETL is in dire need of funding to cover its operating expenses during this period and additional capital expenses (substation equipment and furniture, computers and computer accessories) until the outgoing feeders/commercial agreement phases are complete. The development objectives of PETL are to support its ongoing operations through covering staff salaries and operation expenses for one year. PETL has already ensured the construction of the high-voltage substations (Jenin, Hebron, and Nablus) with financing from the European Investment Bank and contractor expertise from IEC. However the substations are not operational until a commercial agreement with IEC for importing power at high-voltage tariff is signed. PETL staff will also be in charge of the transmission and distribution network around these substations, which is critical to further reduce network losses and ensure security of supply at a lower cost in the West Bank. The achievements of PETL: - PETL has prepared and approved the business plan which is one of the effectiveness disbursement conditions. - PETL is negotiating with IEC a commercial agreement for power purchase. - PETL s technical engineers completed the training conducted by IEC. - PETL is working with PENRA on the Renewable Energy Competitive bidding process that includes draft Power Purchase Agreement (PPA), Transmission Connection Agreement (TCA) and Land Lease Agreement (LLA). Establishment of PERC Start-up operation costs of PERC are financed by the World Bank: - Council regulations recommended and issued a license renewal for NEDCO. - PERC studied the requests from customers regarding the Palestinian Solar Initiative provided by electricity distribution companies. - PERC prepared and approved net metering regulations. - PERC issued the new Feed-In- Tariff for the year 2014 according to the PSI (Palestinian Solar Initiative) and request for offer prices for PV projects in order to calculate the tariff for the year Collected financial and technical data from distribution companies as part of its role in monitoring the electricity market. - Receiving inquiries from subscribers about the services of the electricity sector and dealing with their questions and complaints daily. - Developing consumers connection fees for electricity. Full dissemination of important information to subscribers regarding electricity services and consumption of energy and the correct guidance of public safety through visual media and audio. 82

97 83

98 OUTPUTS Achieved Outputs The most important achievements during the period of the project: 1- PENRA through the PMU issued all the necessary tender documents, evaluation reports, award notifications and signed contracts for all approved projects funded from savings. 2- The DISCOs continued the installation of the prepaid meters in West Bank and Gaza. 3- PENRA crafted the Renewable Energy Law that is pending the President s final signature. 4- PENRA worked with many Municipalities and Village Councils on reconciliation of debt and scheduling payments. 5- PENRA continues the construction of the HV substations in West Bank. Three substations namely Nablus, Jenin and Hebron were commissioned. PROBLEMS OR RISKS AND MITIGATING MEASURES There are several risks associated with the implementation of this program. Some of the risks were unexpected and unavoidable. Below is a list of major risks: Collapse of Palestinian-Israeli cooperation, lack of security preventing field work. The Israeli war on Gaza adversely impacted this program in the form of delayed equipment imports and clearance at customs. It also delayed the work on the HV substations. Implementation delays due to lengthy processes in land expropriation and/or design modifications during the construction phase and/or coordination with Israeli authorities and/or lack of Palestinian resources (financial or human). In future projects, this issue should be clearly addressed with IEC and roles and responsibilities defined for each party regarding land expropriation and the need for large areas to stage the huge HV electrical towers and the required access roads. Addressing these issues from the onset will reduce the implementation time frame. Delays in the Israeli authorities approval of the tax/vat exemption requests. This process can take 2-3 months and PENRA has little control over this process. It ended up delaying the imports of goods and consequently delaying project s completion. ASSESSMENT The different program components have yielded the reduction of the net lending in the past years. Reducing Net Lending continues to be a high priority for PENRA and the PA as a whole. PENRA has continued its efforts to reduce Net Lending through deploying prepaid meters and smart meters (next generation of prepaid meters). Also, the Government completed accounts reconciliations with all distributers, this process contributed to force Municipalities and Village Councils to increase their payments to IEC. Moreover, new legislations and ministerial resolutions have been issued to help distributors to increase their collection rates such as the Clearance Measures for the Electricity Sector issued on November 11, This decree aims to increase collection by end users. No compliant individual will be prevented from obtaining some services such as driver s license, visa application etc. Also, the government issued a Resolution from the Council of Ministers on the Reconciliation of Debt between the government and electricity providers. The effectiveness of the transmission component (component 1) is considered high after the 100% completion of the construction of the high voltage substations in Jenin, Hebron, and Nablus, and 15% completion of the Ramallah substation. In the distribution component especially the rehabilitation activities, the efficiency was very high compared to the budget and work plan; the tendering process was completed, and the physical implementation of the EU and Norway/Sweden funded rehabilitation projects were 100% completed. 84

99 The capacity building component was effective after the creation and operation of PERC and NEDCO. Since the establishment of the Palestinian Electricity Regulatory Council (PERC), many regulations and instructions have been issued such as the setting of electricity tariff and connection fees, licenses for distribution companies, distribution codes, and renewable energy regulations including net metering and feed-in tariff, and others. Also, PERC has been reviewing IEC invoices and payments by DISCOs and local village councils and municipalities. As of NEDCO, it is important to highlight that tangible progress has been achieved in improving the quality of electricity performance within their service area. The total technical and non-technical losses were reduced to 17%, increased the number of consumers to 96,000, etc. The establishment of NEDCO is a step forward toward consolidating the 231 connection points with IEC, which is expected to have positive results toward reducing Net Lending. NEDCO took several measures: restructuring the financial department, updating financial systems and operating procedures, creating an internal monitoring unit, IT integration to allow for daily reconciliation of funds by comparing data from multiple systems like POS (point of sale) and central financial system. PENRA s opinion is that the program inputs produced the desired outputs. After full completion, this project had a positive impact on the development of the electricity sector and the performance of the electricity utilities. The impact on Net Lending has been positive and is expected to improve as the PA continues to apply the actions implemented in the project. Based on data collected from each DISCO, there is a noticeable increase in the number of deployed prepaid meters in 2015, compared to previous years. Still, it is difficult to separate the impact of these steps from other adverse factors affecting Net Lending. The deployment of prepaid meters had a positive impact on collection rates from consumers to DISCOs. The issue of Net Lending has attracted special interest from the PA government especially the Prime Minister due to its devastating impact on the PA s budget and PA s ability to meet its financial obligations. Relevance to the Program Relevance is defined as the extent to which this program is related to the development goals of the Palestinian electricity sector. The Palestinian infrastructure policy set in the National Development Plan (NDP) states that "We must continue to invest in the physical infrastructure of West Bank & Gaza, through both public and private funding in order to propel our development. Improving the quality of basic utilities and other services, including water and energy supply", in addition it states that "We are also committed to strengthening regulatory institutions to ensure fair competition and consumer protection in the provision of core services such as electricity and telecommunication." The Project with all its components directly supported the aforementioned national policy coupled with the PA s need to reduce/eliminate the net lending problem. Also the Project s different components were within the infrastructure sector strategic objectives set under the NDP and mostly the following objectives: 1. To develop integrated and sustainable infrastructure networks. 2. To secure the supply of energy in West Bank & Gaza. 3. To maintain the long term quality, affordability and safety of infrastructure systems. 85

100 The reduction of net lending still is a major goal for the PA, which also emphasizes the relevance of the Program. The program objectives and needs are still valid. All the components and sub-components are essential to achieve the Program goals and targets. In addition to this Program the PA shall continue its drive to improve the collection and the payments to IEC to reduce net lending to the specified targets. Assessment of Sustainability The infrastructure projects included in components 1 and 2 are highly sustainable and will last a very long time as long as they have been planned properly and implemented according to recognized standards, and are well maintained to serve their life span. Also the human resources of the utilities who will run these projects are well trained, and the fact that these projects have been implemented by the utilities will add to the sustainability of these projects. Access to sustainable energy is a key factor for promoting social progress and economic growth, both of which are closely linked to sustainable reduction of poverty. Lack of access to affordable, reliable, safe and environmentally friendly energy is a serious barrier to sustainable development. This has serious implications for West Bank & Gaza, which displays the lowest per capita consumption of electricity in the region with an average of approximately 1000 kwh per capita per year. The capacity building component shall be sustainable as long as it agrees with the national strategy of the sector which is the case as can be seen in the Energy Strategy adopted by the PA. The excellent performance and operation of PERC is of utmost importance to the sector reform, so these will remain a priority for the sector development. The PMU functions had been tapered off in 2014 by shifting the PENRA s Tulkarem warehouse function in the second half of 2014 to PETL. It is worth noting that PMU s important functions will be merged with PENRA and PMU s staff will be transferred gradually to PENRA. Lessons Learned The dependence of PENRA on the PMU for the implementation of this Program as a single governing entity was key to the success of the Program. The PMU had been influential for ensuring consistent procurement processes as directed by donors (different donors have different procurement processes) and minimize overlap in projects and funding. The alternative of allowing each DISCO or government agency to manage their own procurement process would open the door for inconsistencies and difficulty to manage the funds and projects. In addition, PENRA and donors shall continue the implementation of the future Programs through a more harmonized approach in terms of financing, and reporting. Close coordination between financiers and PENRA to measure the progress of the Program and the relevance of planned activities was essential for the success of the Program and evaluation of future needs. Another point is to encourage and facilitate information sharing and best practices among the various DISCOs since most DISCOs are relatively new with the exception of JDECO. One of the recent examples is the collaborative effort to discuss and develop STS Meter s specifications, where PENRA hosted several meetings with representatives from major DISCOs (JDECO, NEDCO, SELCO, GEDCO and HEPCO). 86

101 Annex 9. Comments of Cofinanciers and Other Partners/Stakeholders 87

102 Annex 10. List of Supporting Documents 1. The World Bank, West Bank & Gaza Electric Utility Management Project: Project Appraisal Document, Report No , April 22, The World Bank, West Bank & Gaza Electric Utility Management Project: Trust Fund Grant Agreement, TF GZ, June 30, The World Bank, West Bank & Gaza Electric Utility Management Project: Additional financing for the Electric Utility Management Project, Trust Fund Grant Agreement, TF GZ, July 14, The World Bank, West Bank & Gaza Electric Utility Management Project: Aide-Memoires, Management Letters, Implementation Status and Results Reports, Official Letters, and all other Official Project Documents, From PENRA s Project Monitoring Unit (PMU): Summary Evaluation Report of the Electric Utility Management Project, received in January Studies of the Electric Utility Management Project, listed in Annex 2, Procurement Plans and Audit Reports, Electric Utility Management Project, West Bank and Gaza, Assessment and Action Plan to improve payment for electricity services in the Palestinian Territories, Study on Electricity Sector Contribution to Net Lending, November 25, 2014, World Bank, MENA Region, GEEDR (referred to as the Net Lending Report ). 9. West Bank and Gaza, Biannual Report to the Ad Hoc Liaison Committee, IMF, August

103 MAP (IBRD 36079) 89