ASIAN DEVELOPMENT BANK

TAR:LAO 29284 ASIAN DEVELOPMENT BANK TECHNICAL ASSISTANCE TO ThE LAO PEOPLE'S DEMOCRATIC REPUBLIC FOR ThE CORPORATE AND FINANCIAL DEVELOPMENT OF ELECTRICIT DU LAO LI LI May 1996 - -I

CURRENCY EQUIVALENTS (as of May 1996) Currency Unit - Kip (KN) KN1.00 = $0.0011 $1.00 = KN920 For the purpose of calculations in this Report, an exchange rate of $1.00 = KN920 has been used. ABBREVIATIONS EdL - Electricité du Lao GWh (gigawatt-hour) - 1,000,000 kwh kwh (kilowatt-hour) - 1,000 Wh MW (megawatt) - 1,000 kw Lao PDR - Lao People's Democratic Republic TA - Technical Assistance NOTES (i) (ii) The fiscal year (FY) of the Government ends on 31 December. In this Report, $" refers to US dollars.

I. INTRODUCTION 1. During the Bank's Country Programming Mission in January 1995, the Government of the Lao People's Democratic Republic (Lao PDR) requested inclusion in the Bank's Country Program, of advisory technical assistance (TA) for the Corporate and Financial Development of Electricité du Lao. In October 1995, a Bank Fact-finding Mission visited Lao PDR and reached an understanding with the Government on the objectives, scope, cost, and implementation arrangements of the TA. 1 The TA has been included in the Bank's 1996 Country Program. II. BACKGROUND AND RATIONALE 2. The Bank's activities in the energy sector in Lao PDR have concentrated on the power subsector. The Bank has played a leading role by providing 11 loans to the subsector; acting as coordinator of funds for the second phase of the 1 50-megawatt (MW) Nam Ngum Hydropower Project; and extending TA for project preparation, improvements in operating efficiency, and strengthening the accounting capabilities of Electricité du Lao (EdL). The Bank's strategy in the energy sector supports the Government's objectives, particularly in the development of hydropower resources for export and the expansion of the power system, as hydropower exports are a major foreign exchange earner for the country. Policy dialogue with the Government has focused on cost recovery, improvements in financial and operational efficiency of the power utility, and the development of procedures to identify and evaluate potential power projects for private sector participation, as well as development of the legal framework to facilitate such participation. 3. Power generation, transmission, and distribution are the responsibility of EdL, which is a wholly State-owned public enterprise. EdL's area of responsibility was in the past limited to Vientiane Province, but in mid-1991, the service area was expanded as EdL took over the assets of the provincial electricity authorities in Luang Prabang, Khammouane, Savannakhet, Saravane, and Champassak provinces. In other provinces, local authorities assisted by EdL are responsible for minor electricity networks, but plans are under way to gradually extend EdL's responsibility to the entire country as the grid expands. 4. Access to electricity in Lao PDR is limited, with only about 17 percent of the population currently connected to the relatively small, separated grids. The largest grid serves Vientiane City, the surrounding rural area, and the towns of Vangvieng and Luang Prabang. The Vientiane grid is supplied from the Nam Ngum hydropower station (150 MW). The southern Xeset grid covers parts of Saravane and Champassak provinces and is supplied from the Xeset (45 MW) and Selabam (2 MW) hydropower stations. Both of these grids are interconnected to the Tahir grid for export of electric power generated in excess of domestic demand. Outside these areas, electricity service consists of (i) two small networks serving the capitals of the central provinces of Khammouane and Savannakhet (Thakhek and Savannakhet, respectively) and surrounding areas that are supplied from the Thai grid through cables under the Mekong River; and (ii) scattered, small generating sets (hydro and diesel) serving small communities. 5. Over the past ten years, 70-80 percent of the total electricity generated has been exported to Thailand. At about 43 kilowatt-hours (kwh) in 1994, the domestic per capita The TA was first isted in ADB Business Opportunities in January 1996.

electricity consumption in Lao PDR is among the lowest in Asia. 2 Vientiane and the surrounding area have the best developed distribution network and account for more than 80 percent of domestic consumption. Energy sales in the Vientiane grid have increased at an average of 9.9 percent per annum over the last four years, from 87 gigawatt-hours (GWh) in 1991 to an estimated 127 GWh in 1995, because of increased economic activity, particularly in cottage and small-scale industries. Following commissioning of the Xeset hydropower station in mid-i 991, domestic sales in the Xeset grid grew rapidly to supply the previously suppressed demand, and to meet the increased industrial and commercial loads in the expanding distribution network. Sales in the Xeset grid for 1995 are expected to reach 23 GWh, which is more than three times the 1990 sales (7 GWh). The demand in these two grids, as well as in the central provinces supplied by imports from Thailand, is expected to continue growing rapidly. 6. The most significant past investment in the energy sector was the 150-MW Nam Ngum hydropower station (Phase 1-30 MW; Phase 11-80 MW; and Phase 111-40 MW). Phases I and II were financed mainly on a bilateral basis, while Phase Ill was assisted by the World Bank. In addition, the World Bank financed (i) the power transmission component for the Xeset hydropower station; (ii) power distribution facilities in the southern provinces of Savannakhet, Champassak, and Saravane; and (iii) the investigation work for small-scale hydropower development in these provinces. The most recent assistance provided by the World Bank is the expansion of the transmission and distribution networks in the central and southern provinces, including the institutional development of EdL and a feasibility study for further expansion of Nam Ngum. 7. The Bank's 11 loans to the power subsector to date have included 3 supplementary loans to finance cost overruns, for a total of 7 projects. Four projects financed by seven loans are complete: two (the Nam Ngum-Luang Prabang Power Transmission Project, for which a supplementary loan was approved by the Bank in August 1994, and the Nam Song Hydropower Development Project) are at an advanced stage of implementation, while implementation of the 210-MW Theun-Hinboun Hydropower Project, approved in November 1994, has just commenced. The completed power projects have been postevaluated. The first, the Vientiane Power Distribution Project, was rated partly successful, as it experienced a cost overrun following civil unrest in the country in the mid-1970s, resulting in the need for a supplementary loan. The next two projects, Vientiane Plain Rural Electrification, Phases I and II, while relatively problem free and, therefore, rated generally successful, highlighted the need to address the issues of low domestic tariffs, and high accounts receivable and system losses in the Vientiane Plain grid. The Xeset Hydropower Project was also rated generally successful; it was implemented within the original schedule but incurred a cost overrun because of factors beyond the control of Project management. The Project Performance Audit Report identified the continuing need to address the issues of domestic tariffs and system losses, and to implement the EdL reorganization plan that had been prepared under a World Bank credit3 and approved by the Government. Policy dialogue with the Government has addressed the issues raised in the postevaluation exercise, indicating that cognizance has been taken of the previous experience gained in lending to the power subsector. This compares with 26 kwh in Cambodia, 28 kwh in Nepal, 42 kwh in Bangladesh, 130 kwh in Viet Nam, and 739 kwh in Thailand. IDA Credit No. 2425: Provincial Grid Integration Project, approved on 23 December 1992.

3 8. Discussions with the Government and EdL have covered two main areas: private sector participation in the power subsector and EdL's institutional capability and financial performance. Given the Government's limited capital resources and its ambitious investment program, the dialogue has focused on the institutional and financial aspects of EdL to ensure the efficient development of the power subsector. The success of the policy dialogue is indicated by the significant improvement of EdL's institutional strength and the major tariff increases during the past years, as well as by the recognition by the Government of the need to corporatize EdL. The latter has become a priority under the recently enacted Public Enterprise Law, and a restructuring of Ed L's organizational and management structure is already under way. The new corporate structure includes a Board of Directors and four Deputy General Manager positions to lessen the span of management control, which was a major problem with the previous structure. The restructuring establishes EdL as an autonomous corporate body with a defined role and set of responsibilities, while at the same time providing it with the tools to become a modern utility, able to deal effectively with private sector sponsors. The restructuring has also seen the creation of a Department of Electricity within the Ministry of Industry and Handicraft, responsible for policy issues including initial approval of the tariff structure. This has been a major change in policy, with the Government assuming the role of the regulator of the power subsector as opposed to being its operator. 9. To meet the Government's objective of improving the corporate financial and management capacity of EdLto accelerate operational performance in the power subsector, EdL will require assistance in developing a sound business plan and a revenue base to ensure future viability. This is particularly important as EdL enters a phase of rapid expansion within the country as well as entering into several joint venture agreements with the private sector. 10. The scope of work to be undertaken through the TA conforms to the Bank's sectoral strategy. As outlined in the Bank's 1996 Country Assistance Plan for Lao PDR, one of the objectives of the Bank's interim operational strategy is to provide for policy ana'ysis and administrative reforms to provide the policy and institutional framework necessary for development and for private sector participation in the power subsector. The establishment of a modern and efficient power utility capable of meeting the demand of supplying reasonably priced electricity to sectors of the economy is a vital part of this strategy. The scope of work covered under the TA also conforms to the Government's objective of establishing EdL as a profitable State-owned corporation able to effectively fulfill the power needs of the country. A. Objectives Ill. THE TECHNICAL ASSISTANCE 11. The objectives of the TA are to assist EdL in the development of a five-year corporate plan and to update a 1990 national tariff study prepared under Bank assistance. B. Scope 12. The scope of the TA will include (i) definition and evaluation of alternative strategies for EdL's operation during 1996-2000, while identifying an operational strategy that offers the best prospects for EdL's ongoing evolution as a profitable, autonomous, and selffinancing institution able to fully support the Government's objectives for the promotion of private sector investment activity and for the development of the power subsector in Lao PDR; -- L_ --_ I. -,, I,Il,lIlIVlJ!I.l(J

ru (ii) development of a corporate plan for EdL's operations through the year 2000 that will provide for the most effective implementation of the operational strategy; and (iii) development of a tariff structure (based on voltage levels and consumption patterns) to meet sector financial and social objectives. The terms of reference and the required person-months of the experts are shown in Appendix 1. C. Cost Estimates and Financing Plan 13. The total cost of the TA is estimated at $390,000 equivalent, consisting of $340,000 in foreign exchange cost and $50,000 equivalent in local currency cost. The Bank will finance the entire foreign exchange cost of $340,000. The TA will be financed by the Bank on a grant basis. The Government has agreed to make available suitably qualified and experienced counterpart staff, office accommodations, office supplies, local transport, local communication facilities, and administrative support, equivalent to $50,000. Details of the cost estimates are attached as Appendix 2. D. Implementation Arrangements 14. EdL will be the Executing Agency for the TA. EdL has completed several Bankfinanced projects and TAs in the power subsector, and its overall performance has been satisfactory. Consultants will be selected by the Bank in accordance with the Bank's Guidelines on the Use of Consultants. The services will be provided by a team of experts from an international consulting firm with experience in developing of corporate plans and in electric power tariff studies. The TA will require about 12 person-months of consulting services spread over a period of six months. A tripartite meeting among the Government, the Bank, and the consultants will be held after the submission of the draft final report. The work is expected to commence in June 1996 and to be completed by November 1996. IV. THE PRESIDENT'S DECISION 15. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance, on a grant basis, to the Government of the Lao People's Democratic Republic in an amount not exceeding the equivalent of $340,000 for the purpose of the Corporate and Financial Development of Electricité du Lao, and hereby reports such action to the Board.

5 Appendix 1, page 1 BROAD TERMS OF REFERENCE A. Part A: Development of a Corporate Plan for EdL 1. Objectives 1. The consultants will define and evaluate alternative strategies for EdL's operation during 1996-2000, and identify an operational strategy that offers the best prospects for EdL's ongoing evolution as a profitable, autonomous, and self-financing institution able to fully support the Government's objectives for the promotion of private sector investment activity and for the development of the power subsector in Lao PDR. 2. The consultants will develop a corporate plan for EdL's operations through the year 2000 that will provide for the most effective implementation of the operational strategy developed above. 3. Both the operational strategy and the corporate plan should pay particular attention to addressing the problems of private sector participation in the power subsector and to EdL's financial and institutional capacity. 2. Terms of Reference 4. The terms of reference will include the following: (i) (ii) (iii) (iv) develop, in close consultation with Ed L's Board and Management, specific operational objectives for 1996-2000, in terms of EdL's profitability, operational performance (i.e., collection and arrears ratios), financial structure, and the economic benefits derived from EdL's operations; based on a review of current private sector investment activity, Government incentives for private-sector investment in the power subsector, prospective pipeline projects within EdL, and the current state of development of the power subsector; develop estimates of the demand for financing EdL will face. review EdL's current operations, in close consultation with the Government as the sole shareholder, with the objective of identifying the major areas of weak performance; based on the review, develop specific recommendations for change in EdL's operational policies, operational procedures, and staff training programs that will directly address the major operational weaknesses; taking account of the Government's dual objectives of increasing the electrification ratio within the country and increasing foreign exchange earnings through the export of power, identify the relative cost to EdL and benefits to the country from each of these aspects of EdL's operations; based on this analysis, critically assess EdL's current operating policies (Reference in text: page 4, para. 12)

6 for private sector power operations and rural electrification, and recommend improvements that will enhance the efficiency of suchoperations; identify the costs associated with rural electrification operations that could be the basis for an explicit subsidy from the Government to allow EdL to undertake a degree of small-scale rural electrification without detriment to its financial condition and general operational capabilities; and (v) based on the output of the tasks described in (i) to (iv), develop yearly financial projections that EdL could realistically achieve during 1996-2000 and that will offer the best prospects for achieving the objectives developed from (i) above; the output from this task will be presented as a business development plan that may propose appropriate diversification of EdL's activities. B. Part B: National Tariff Study 1. Objectives 5. The current retail tariff for public power supply in Lao PDR requires adjustment to meet the financial and other objectives of EdL. The main objectives of the study are to develop a tariff policy based on appropriate financial and social objectives and to formulate suitable tarift structures to meet sector objectives based on voltage levels and consumption patterns. 2. Terms of Reference 6. The terms of reference will include the following: (i) (ii) (iii) (iv) (v) (vi) review the current pricing structure of the electricity sector; this will include a review of the long-run marginal cost of supply, both economic and financial, at different delivery points, as well as a review of the desirability and practicability of having a uniform tariff throughout the country; carry out a survey of residential consumers to determine their ability and willingness to pay; develop a tariff policy based upon appropriate financial and cost recovery objectives of the power sector and consumers' ability and willingness to pay; review the adequacy of the existing tariff in terms of both level and structure based on the tariff policy developed in (iii) above and by drawing on, where appropriate, experience with tariff levels and the structure of other power utilities of the region; review the billing and collection capabilities of EdL, determine the extent to which these capabilities may affect the implementation of a revised tariff structure, and recommend suitable improvements; and formulate and recommend an appropriate tariff structure that is consistent with the tariff policy developed in (iii) above, and the billing and collection capabilities of EdL, that will enable the power subsector to meet its operational budgets and to

7 finance a reasonable proportion of its capital development program (new capacity additions under build-operate-transfer or joint-venture type of investments and their likely costs should be considered in formulating the bulk tariff). 3. Reporting Requirements a. Inception Report 7. The consultant will submit an inception report for Bank approval within six weeks of the commencement of the assignment. The report will detail initial findings, proposed methodology, and the timetable for the remainder of the study. Four copies of the inception report will be submitted to the Bank and four to the Government. b. Draft Final Report 8. A draft final report will be submitted for the approval of the Bank within four months of the commencement of the assignment. Four copies of this report will be submitted to the Bank, four to the Government, and four to the power companies. c. Final Report 9. The final report will be submitted within one month of the receipt of comments,. Three copies of the final report will be submitted to the Bank, and ten to the Government and Ed L. C. Executing Agency Inputs 10. The Executing Agency, EdL, will provide, free of charge, all project information, office accommodation, local transport, secretarial services, interpreters, and local communications. The consultants are expected to make their own arrangements for word processing and computer facilities. For this purpose, personal computers and related software may be purchased under the TA, for subsequent transfer to EdL at the discretion of the Bank.

8 Appendix 2 COST ESTIMATE AND FINANCING PLAN ($) Foreign Local Total Item Exchange Currency Cost A. Bank Financing 1. Consultants - Field 228,000 a. Remuneration 228,000 b. Per Diem 36,000 36,000 c. International Travel 15,000 15,000 2. Equipment 3. Reports 4. Contract Negotiations 5. Miscellaneous (communications, supplies) 6. Contingency Subtotal (A) B. Government Financing 1. Counterpart Staff 2. Office Facilities 3. Contingencies Subtotal (B) Total 10,000 10,000 5,000 5,000 3,000 3,000 9,000 9,000 34,000 34,000 340,000 340,000 15,000 15,000 30,000 30,000 5,000 5,000 50,000 50,000 340,000 50,000 390,000 Source: Staff estimates. (Reference in text: page 4, para. 13)