Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized
Report No: 43778 - AL
PROJECT APPRAISAL DOCUMENT Public Disclosure Authorized ONA
PROPOSED CREDIT
IN THE AMOUNT OF SDR 21.7 MILLION (US$35.3 MILLION EQUIVALENT)
TO
ALBANIA
FOR
Public Disclosure Authorized A
DAM SAFETY PROJECT (PHASE 5)
IN SUPPORT OF THE SOUTH EAST EUROPE APL PROGRAM
June 30,2008
Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUJYALENTS
(Exchange Rate Effective April 2008)
CurrencyUnit = Lek Lek79 = US$1 US$1.62 = Euro 1 US$1.62 = SDR 1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AlbCOLD Albanian Commission ofLarge Dams AMM Albanian Market Model APL Adaptable Program Loan CAS Country Assistance Strategy COOP1 Cooperazione Internazionale - Italian Bilateral Aid Agency DSO Distribution System Operator EBRD European Bank for Reconstruction and Development EC European Commission ECSEE Energy Community of South East Europe EIB European Investment Bank EIRR Economic Internal Rate ofReturn EMP Environmental Management Plan ERE Electricity Regulatory Authority ETSO European Transmission System Operators EU European Union FMM Financial Management Manual FMR Financial Management Report GPS Geographic Positioning System IAS International Accounting Standards IASB International Accounting Standards Board ICB International Competitive Bidding IFAC International Federation ofAccountants IFC International Finance Corporation IFRS International Financial Reporting Standards ISA International Standards on Auditing KESH Albanian Electricity Corporation KfW Bank for Reconstruction (Germany) METE Ministry ofEconomy, Trade and Energy PMU Project Management Unit PSGRP Power Sector Generation and Restructuring Project QCBS Quality and Cost-Based Selection SEE South East Europe SECO State Secretariat for Economic Affairs of Switzerland TSO Transmission System Operator UCTE Union for the Coordination of Transmission ofElectricity in Europe USAID United States Agency for International Development VAT Value Added Tax
~ Vice President: Shigeo Katsu Country Director: Jane Armitage Country Manager Camille Lampart Nuamah Sector Manager: Charles Feinstein Task Team Leader: Demetrios Papathanasiou ALBANIA Energy Community of South East Europe APL Program .APL 5 for Albania DAM SAFETY
CONTENTS
Page
I. STRATEGIC CONTEXT AND RATIONALE ...... 1 A . Program. Country and sector issues ...... 1 B. Rationale for Bank involvement ...... 3 C . Higher level objectives to which the project contributes ...... 5
I1. PROJECT DESCRIPTION ...... 5 A . Lending instrument ...... 5 B. Program objective and phases ...... 6 C . Project development objective and key indicators ...... 7 D. Project components ...... 8 E. Lessons learned and reflected in the project design...... 10 F. Alternatives considered and reasons for rejection ...... 12
I11. IMPLEMENTATION ...... 12 A . Partnership arrangements ...... 12 B. Institutional and implementation arrangements...... 12 C . Monitoring and evaluation of outcomes/results ...... ,...... 13 ... D. Sustainability...... 14 E. Critical risks and possible controversial aspects ...... 14 F. Loadcredit conditions and covenants ...... 15
IV. APPRAISAL SUMMARY ...... 16 A . Economic and financial analyses ...... 16 B. Technical ...... 17 C . Fiduciary ...... 18 D. Social...... 19 E. Environment...... 20 F. Safeguard policies ...... 20 G. Policy Exceptions and Readiness...... 21 Annex 1: Country and Sector or Program Background ...... 22
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 34
Annex 3: Results Framework and Monitoring ...... 36
Annex 4: Detailed Project Description...... 41
Annex 5: Project Costs ...... 44
Annex 7: Financial Management and Disbursement Arrangements...... 49
Annex 8: Procurement Arrangements ...... 54
Annex 9: Economic and Financial Analysis ...... 59
Annex 11: Project Preparation and Supervision ...... 67
Annex 12: Documents in the Project File ...... 69
Annex 13: Statement of Loans and Credits ...... 70
Annex 14: Country at a Glance ...... 71
Annex 15: Maps...... 73 ALBANIA
ENERGY COMMUNITY OF SOUTH EAST EUROPE APL PROGRAM - APL 5 FOR ALBANIA DAM SAFETY
PROJECT APPRAISAL DOCUMENT
EUROPE AND CENTRAL ASIA
ECSSD
Date: May 19,2008 Team Leader: Demetrios Papathanasiou Country Director: Jane Armitage Sectors: Power (50%); Renewable energy Sector ManagerDirector: Peter D. Thomson (50%) Themes: Other environment and natural resources management (P);Infrastructure services for private sector development (S);Water resource management (S) Project ID: P110481 Environmental screening category: Partial Assessment Lending Instrument: Adaptable Program Loan Project Financing Data [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other:
For Loans/Credits/Others: Total Bank financing (US$m.): 35.3 Proposed terms: 20 years with a 10-year grace period and at the standard IDA service charge.
Source Local Foreign Total BORROWERRECIPIENT 8.90 0.00 8.90 International Development Association 0.00 35.30 35.30 (IDA) State Secretariat for Economic Affairs of 0.00 7.50 7.50 Switzerland (SECO) European Bank for Reconstruction and 0.00 7.70 7.70 Development (EBRD) Total: 8.90 50.5 59.4
Borrower: Republic ofAlbania Albania
Responsible Agency: KESH Blloku Tirana Albania Tel: 355 42 62055 Fax: 355 42 32024 [email protected]. a1
Estimated disbursements (Bank FYAJS$m) FY 1 2009 I 2010 I 2011 I 2012 I 2013 1 Annual 6.10 11.36 9.44 5.12 3.28 Cumulative 6.10 17.46 26.90 32.02 35.3
The development objectives ofthis ECSEE APL5 project are to: (i)contribute to safeguarding the major hydroelectric plants ofAlbania and (ii)improve their operational efficiency and enhance the stability ofpower supply for the regional electricity market. The proposed project supports the development ofthe Energy Community in accordance with the objectives ofthe Energy Community APL. The project’s main impact would be to prevent a possible catastrophe resulting from a dam failure. Such a catastrophe could result in significant loss oflife and damage to property of persons living in downstream areas. It would also cause a major and prolonged fall in hydropower production that would severely affect the entire population ofAlbania and would likely significantly increase electricity prices in the whole SEE region. Poor and vulnerable people in the region would likely suffer disproportionately from any such electricity price increases. In addition, the project would assist Albania to maximize its benefits from existing hydropower by improving operational practices ofexisting facilities and enabling more effective participation in the regional electricity market. The project will also promote private sector investment in hydropower by collecting, organizing, and making available, better data and studies on the country’ s hydropower potentia1 .
Project description [one-sentence summary of each component] Re$ PAD ILD., Technical Annex 4 The project consists oftwo main components: (1) physical infrastructure investments; and (2) technic a1 assistance. Physical infrastructure investments include: (i)the specification and implementation ofwater alarm systems in the Drin and Mat River basins, and specification ofan Emergency Action Plan; (ii)Rehabilitation ofspillways on Fierza, Koman and Vau iDejes dams on the Drin river; (iii) . rehabilitation ofelectromechanical equipment in the Koman dam; and (iv) implementation of Load Frequency Control system in Vau i Dejes and Fierza Dams. The technical assistance component will finance: (i)hydrology studies and water management; (ii)implementation consultants; (iii)studies for new hydropower development; (iv) financial management systems capacity building; and (v) international panel ofexperts on Safety of Dams. Which safeguard policies are triggered, if any? Ref: PAD IVY., Technical Annex 10 Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I 1x1 Pest Management (OP 4.09) [I [XI Physical Cultural Resources (OPBP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety ofDams (OP/BP 4.37) [XI [I Projects in Disputed Areas (OP/BP 7.60)" [I [XI Projects on International Waterways (OPBP 7.50) [XI [I
Significant, non-standard conditions, if any, for: Ref: PAD III.F. Board presentation: Not applicable. Albania is a signatory to the ECSEE Treaty and meets the initial ECSEE APL eligibility conditions and the project complies with Bank safeguard policies.
Loadcredit effectiveness: Not applicable. Albania already meets the initial ECSEE eligibility conditions.
Covenants applicable to project implementation:
1. The Borrower has agreed to:
0 On-lend the funds to KESH for 20 years with a 10-year grace period and at the standard IDA service charge. 2. KESHhas agreed to:
e Not later than September 30, 2009, prepare and adopt an Emergency Preparedness Plan, in a manner satisfactory to the Association. e Not later than September 30, 2008, appoint, and thereafter maintain, a Panel of Experts with terms ofreference acceptable to the Association. e Prior to the commencement of procurement activities under Part 1.4 of the Project, prepare a Resettlement Action Plan and update the Environmental Management Plan, if required in the opinion of the Association, and in a manner satisfactory to the Association. e Adopt the Dam Safety Institutional Plan by December 3 1, 2008 and thereafter implement the Dam Safety Institutional Plan in a manner acceptable to the Bank. a Carry out procurement in accordance with the provisions of Schedule 1 to the Project Agreement, as said provisions my be hrther elaborated in the Procurement Plan; e Update the Procurement Plan in accordance with guidelines acceptable to the Association, and furnish such update to the Association not later than 12 months after the date ofthe preceding Procurement Plan, for the Association’s approval; e Maintain a self-financing ratio ofat least 0.35 in 2008 and onwards; e Not incur new debt unless KESH’s total debt service is covered at least 1.5 times by net internal cash generation; e By October 15 of each year, commencing in 2008, on the basis of forecasts prepared by KESH, review whether it would meet the self-financing requirements for the following year, and furnish the results ofthis review to the Association; e By October 15 ofeach year, commencing in 2008, review its program ofproposed capital expenditures for the following five years, and finalize said program, acceptable to the Association; a Maintain an acceptable financial management system with accounting standards according to International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) for the purposes of the financial statements required to reflect its operations and financial conditions, and to register separately the operations, resources and expenditures related to the project; e By March of each year, appoint an independent auditor acceptable to the Association to audit the project accounts and financial statements of the company for the same fiscal year and submit, within six months after the close of each fiscal year, these audited accounts and statements. In addition, the audits will be conducted in accordance with International Standards on Auditing (ISA) as issued by the International Federation of Accountants (IFAC) and on terms ofreference acceptable to the Association. e Implement the Environmental Management Plan in a timely manner; 0 Establish an Emergency Preparedness Plan by September 30,2009; e By December 31, 201 1, furnish to the Association a monitoring and evaluation report, and by January 15,2012 review this report with the Association; and e Prepare a plan for the fbture operation ofthe project not later than six months before the closing date ofthe project. I. STRATEGIC CONTEXT AND RATIONALE
A. Program, Country and sector issues
3. Overall ECSEE APL Program. The improvement ofthe performance ofthe energy sector is crucial to sustain economic development in South East Europe (SEE). The power supply situation has tightened significantly since 2006, as shown by a near doubling of prices of electricity traded in SEE. Electricity supply constraints threaten to constrain economic activity and quality of life if not addressed with determined regional action. Apart from Turkey, investment over the past 10-15 years has been limited, with the average age of generation capacity now in excess of thirty years. Significant capacity additions (in the order of 12,000- 15,000 MW) and plant rehabilitations (in the order of8,000-9,000 MW) will be required over the period to 2020, along with matching transmission and distribution system investments, if demand is to be met and severe power shortages are to be avoided.’ 4. The SEE countries have acknowledged that solutions to these regional issues based on isolated national markets are neither desirable nor feasible as a means to attempt to close investment gaps and emerging demand and supply imbalances. Building upon their desire to cooperate in the power sector, in recognition ofpotential gains from increased trade, and as part of a wider movement to strengthen regional cooperation, the Governments ofthe SEE countries and the European Commission signed the “Athens Memorandum” - the Memorandum of Understanding on the Regional Energy Market in South East Europe and its Integration into the European Community Internal Energy Market - on December 8, 2003 in Athens, Greece. This Memorandum (followed by a Treaty, see below) formally expressed their commitment to what was initially called the Energy Community of South East Europe (ECSEE), but was subsequently shortened to the Energy Community. 5. The Treaty establishing the Energy Community (the Treaty). The Council of the European Union authorized the European Commission (EC) in June 2004 to open negotiations on behalf of the European Union, with SEE countries. The Energy Community’s Ministerial Council concluded on December 13,2004 that there was broad agreement on the substance ofthe Treaty and directed their negotiators to conclude the remaining details as soon as possible. The Treaty was consequently signed on October 23, 2005 by all of the Energy Community’s Regional Members (with the exception ofTurkey) and the European Community. The Treaty entered into force on July 1,2006. 6. Current membership of the Energy Community is as follows: (i)State Parties are Albania, Bosnia and Herzegovina, Croatia, the Former Yugoslavian Republic of Macedonia, Serbia, Montenegro; (ii)The United Nations Interim Administration Mission in Kosovo, administering Kosovo pursuant to the United Nations Security Council Resolution 1244, is an Adhering Party; (iii)The State Parties and the Adhering Party together are Regional Members (also referred to as the Contracting Parties); (iv) EU Member States Austria, Bulgaria, Cyprus, Czech Republic, Germany, Greece, Hungary, Italy, Romania and Slovenia are Participants -any other EU Member States can also request to become a participant; and (v) neighboring Non-EU Member States can request to participate as Observers. Currently, Moldova, Turkey, Norway, Ukraine and Georgia are participating as observers.
~~ Generation Investment Study for South East Europe (2004), a joint project of the Bank and the European Commission. The study was updated by the World Bank in January 2007.
1 7. Albania Power Sector (See also Annex 1). At the beginning of Albania’s economic transition in the early 199Os, the country was virtually 100% electrified and was a net electricity exporter to the region. Electricity demand within Albania fell initially to 79% of the 1989 level by 1992 because of declines in industrial production. Thereafter it rose on average by 10% per year to 2000. By 1998, Albania had become a net electricity importer. From the second half of 2000, the need for imports increased greatly as a result of a fall in hydropower production caused by reduced rainfall. The country was unable to get all the imported electricity it needed because oftransmission and financial constraints. The result was large load shedding, which had serious adverse macroeconomic effects. The fall in hydropower production between 2000 and 2002, and in 2007 had a direct and significant adverse impact on national economic output, and the load shedding caused cuts in production by industry and obliged other businesses to purchase and use costly back-up diesel generators. Households had to suffer without electricity for many hours of each day. 8. The Albanian Power Corporation (KESH) was unable to pay for more than a small proportion ofthe imports needed out ofits own resources because of financial difficulties caused by widespread illegal use ofelectricity, poor payment ofbills and retail prices which were below the cost of imported electricity. Faced with these difficulties, the Government started providing a subsidy in 2000, but its large level (US$3 1.5 million) in 2001 diverted funds from other critical needs including poverty reduction measures. KESH also began implementation at the start of 2001of a rolling multi-year Power Sector Action Plan to tackle the critical issues of the sector, with detailed quarterly and annual targets for key variables such as network losses and bill collection. It managed to reduce transmission and distribution losses from 44.8% of transmission in 2001 to 39.7% in 2004. It also improved collections from 76.3% ofthe amount billed in 2001 to 88.9% in 2003, with a fall to 83.8% in 2004, largely through reductions in receivables from Government budgetary and non-budgetary entities. In addition, the Electricity Regulatory Authority (ERE) raised the average tariff from Lek 4.41kWh (excluding VAT) in 2001 to Lek 6.7OkWh in 2004. As a result ofthese measures, collected revenue increased from Lek 12.50 billion (including VAT) in 2001 to Lek 23.84 billion in 2004. These improvements and greatly improved hydrology after 2002 enabled KESH to achieve satisfactory financial performance and allowed the import subsidy to be phased out by the end of2004. 9. Power sector improvements were partly reversed in 2005 and 2006 because of disruption caused by Parliamentary elections, the coming into power ofa new Government and the ensuing replacement ofKESH’s management and many employees. Total losses rose to 41-9% in 2006, the collection rate fell to 8 1.9%, while the tariff was raised to Lek 7.26kWh. Collected revenue reached only Lek 24.86 billion in 2006. A turnaround began in March 2007 with the appointment of a new manager in KESH. The new management has been giving high and widely publicized priority to reducing non-technical losses and improving collections. As a result, total losses fell to 37.1% in 2007, the collection rate increased to 89.5%, and KESH’s collected revenue for 2007 reached Lek 27.25 billion. Nevertheless, the return to below average hydrology in late 2006 and a simultaneous large increase in electricity import prices created severe cash-flow difficulties for KESH in 2007. The Government provided some relief by paying off outstanding arrears on bills to government budgetary and non-budgetary entities and by providing loans. KESH also obtained large overdraft facilities from Albanian commercial banks to help pay for imported electricity. Despite these contributions from the Government and banks, KESH was obliged to increase load shedding to a record-high 927 GWh. ERE approved a tariff increase of about 15% to a level of Lek 8.23kWh applicable from March 2008 (Lek
2 8.04kWh average for 2008), but KESH has continued to have cash-flow difficulties during the first quarter of2008. 10. The electricity sector in Albania is undergoing reform. The Law on Regulation of the Electricity Sector, enacted in August 2003, provided for strengthening of ERE, and removed the authority of the Government to fix a price cap. The Transmission System Operator (TSO), created from the separation oftransmission from KESH, was registered as a joint-stock company on July 14, 2004 with KESH as the holding company. The Transitional Market Model was approved in August 2004. In compliance with the Energy Community treaty, all non-household customers have been granted the right to become eligible consumers and choose their own suppliers. However, all but one customer have chosen to remain as tariff customers in 2008. The strengthening of ERE’Sindependence and the creation of the TSO enabled Albania to meet the initial conditions of membership in the Energy Community. A second phase of the reform process leading to privatization and further implementation of the market model commenced with the Government’s decision in 2006 to privatize power distribution. IFC is providing assistance to the Government towards the goal of selling the power distribution company to a strategic investor in 2008. A revised market model, the Albanian Market Model (AMM), has been approved by the Government. The AMM distinguishes between a Wholesale Public Supplier, which would initially be a part ofKESH, and a Retail Public Supplier, which is to be privatized with the distribution company. The Wholesale Public Supplier is to be responsible for security ofsupply to all tariff customers. It will sell its electricity to the Retail Public Supplier at a price regulated by ERE. 11. The AMM also stipulates that a power generation company, KESH Gen, is to be separated from KESH and incorporated. Its shares will be held initially by KESH, while options for its future structure and ownership will be examined under the project. KESH Gen will be responsible for the three hydropower plants on the Drin River and the two hydropower plants on the Mat River that would be the beneficiaries ofthe proposed project. The AMM stipulates that KESH Gen will provide ancillary services to the TSO and offer its remaining electricity to the Wholesale Public Supplier at a regulated tariff. Any electricity not taken by the Wholesale Public Supplier may be sold on the market, but the profits are to be provided to tariff consumers through later adjustments in KESH Gen’s regulated tariff. Because of Albania’s large power net-import situation, the Wholesale Public Supplier is expected to require all production made available by KESH Gen in the foreseeable future, except possibly in good hydrological years. B. Rationale for Bank involvement 12. ECSEE Program. The Bank remains heavily involved in the integration ofthe SEE Energy Market. First, the Bank is participating in regional efforts to promote cooperation and integration in South East Europe and inter alia supports the Stability Pact2. Second, the Bank is an active participant in the Athens process, at the request of the EC. Third, the Bank has supported individual countries of South East Europe in their efforts to rehabilitate and restructure their power sectors through policy dialogue, technical assistance and financing since the early 1990s (in some cases even earlier). This deep regional and country knowledge and participation in the development ofthe Athens process puts the Bank in a strong position to provide regional
The Stability Pact was substituted by the Regional Co-operation Council on February 27,2008. The Regional Co- operation Council inherited the mandate ofthe Stability Pact to oversee co-operation processes in South Eastern- Europe and to support European and Euro-Atlantic integration of the region.
3 lending, policy advice and technical assistance to further support the Athens process. The ECSEE APL program was approved by the Board on January 27,2005. It is a key component of the Bank’s support for the Stability Pact and its working partnership with the EC.
13. ECSEE APL5-Dam Safety Project. Albania’s hydropower plants are a precious asset both for the country and the regional electricity system. The two main cascades on the Drin River and the Mat River have an installed capacity of 1.45 GW, produce over 90% of domestic electricity and supply normally more than 65% ofthe country’s total demand. In an average hydrological year, Albania generates about 4.2 GWh of hydroelectricity. At current market prices of electricity in the region, this represents an annual value of more than US$ 450m, while the asset value ofthese hydro dams could be well above US$3 billion. 14. Building works for Albania’s hydropower dams started in the 1950s and the last one was completed in the mid-eighties. However, these major infkastructure facilities have been inadequately monitored and maintained for more than 15 years3 and there may now be a risk of a dam failure. Following the World Bank’s warning on this issue, a “Dam Safe@ Survey for Hydropower Plants Located on the Drin and Mat River Cascades” was funded by the Swiss Secretariat ofEconomic Affairs (SECO) and completed in late 2006 (Dam Safety Survey). The report identified serious deficiencies and concluded that “the present state of the dam safety is uncertain, and a disaster . .. could be considered as possible . . , if matters are left to deteriorate further”. Both the institutional set-up and the monitoring and physical infrastructure facilities were found in need of significant improvements, while the costs of a dam failure would be huge both economically and in human lives. 15. Support for Albania’s hydropower dams is needed not only because ofthe significant safety risks involved for the country and the need to bring dam safety in Albania to modem standards, but also to improve the country’s overall hydropower operation and benefit the whole regional electricity system. Most important for the regional electricity market is the significant storage capacity of the dams, which can provide considerable benefits for the South East Europe electricity grid. Storage of electricity in hydropower dams can promote economic efficiency in the regional market (complementing existing thermal power plants) and would be necessary to incorporate other new renewable energy generation in the region (for instance wind power, which is intermittent by nature and needs electricity storage facilities so that it can be economically and effectively integrated in electricity systems). Preliminary surveys indicate that additional pumped-storage hydroelectric plants may be economical in the Drin Cascade, however more detailed pre-feasibility work will clarify the actual potential and its benefits for the regional electricity system. Addressing the safety risks of the existing dams, and bringing their safety standards to modem norms, would create valuable options for Albania and the region regarding the future operation and ownership ofthese hydroelectric facilities. The project is included in the Country Assistance Strategy Progress Report for Albania dated May 9,2008. 16. The Albanian Government recognizes the high importance of hydropower for the country’s and the regional electricity system and has a strategic objective of developing the remaining hydropower potential of the country (small and large-scale hydro) under a concession scheme and public-private partnerships. The Bank and the IFC have assisted the Government with its Concessions Law (approved in December 2006), and, in response to the Government’s requests,
3 The Drin Cascade Rehabilitation program -a donor-funded project-that was completed in 2007 focused on the rehabilitation of intake gates and electromechanical equipment for the Fierza and Vau iDejes dams only.
4 will finance preliminary development work to assist the Government to assess in more detail the risks and costs ofnew projects4. An earlier Bank project for rehabilitation ofdams for irrigation will be completed in June 2008 and will provide an assessment of needed investments for agricultural dams. In addition, a series of projects are currently underway to improve the country’s regional interconnections, while the Government’s strategy is to hrther expand its transmission connections with neighboring countries. C. Higher level objectives to which the project contributes 17. ECSEE Program All SEE countries have the prospect of EU membership. “The Thessaloniki Agenda for the Western Balkans: “Moving towards European Integration,” which was endorsed by the European Council in Thessaloniki in June 2003, encourages the region to adopt legally binding energy market agreements as has now been done with electricity. 18. The Energy Community and the Athens Process are integral elements of the strategy developed by the Regional Members and the European Commission for all states in South East Europe to have access to a stable and continuous energy supply. This is regarded as essential for economic development and social stability. The creation of an area without internal frontiers for energy contributes to economic and social progress and a higher level of employment as well as balanced and sustainable development. These higher level objectives are expressed in the Energy Community Treaty which is discussed above. 19. The Stability Pact has made regional energy cooperation one of its core objectives in its efforts to strengthen regional cooperation and to foster the conditions for peace, stability and economic growth in South East Europe. The Stability Pact has characterized the Energy Community as a unique chance for the SEE region to consolidate reconciliation and provides a driver towards a comprehensive economic and political integration into the European Union. 20. The Bank supports regional efforts to promote cooperation and integration in South East Europe. The Energy Community is one ofthe most prominent ofthe current regional programs. The ECSEE APL facility is a key component ofthe Bank’s support for the Stability Pact and the working partnership with the European Commission.
11. PROJECT DESCRIPTION
A. Lending instrument 21. The Energy Community is a regional program and the Bank investment support is being provided on a regional basis using the adaptable program lending (APL) instrument, horizontally to support Regional Members (up to eight countries and Kosovo) and vertically (each Regional Member can in principle receive support from more than one APL installment over the APL program period). The APL instrument enables the Bank to provide support in a flexible manner -when individual countries have met the policy triggers (country criteria under the Athens process) and when individual projects are ready to receive Bank support. All Regional Members might not actually borrow under the APL program. However, countries would know up-front that they can rely on the Bank to support them in achieving the goals of the ECSEE Program if they meet specific eligibility criteria and if they need Bank support. The approved size of the
KfW also has a project oftechnical assistance and guarantee-financing to support small-hydropower projects in Albania.
5 APL lending facility is US$ 1,000 million. The proposed ECSEE APL 5 Dam Safety project is in the fifth phase ofthe ECSEE APL Program’. B. Program objective and phases 22. The key objectives ofthe ECSEE Program are to: a. Create a stable regulatory and market framework to attract investment in gas networks and power systems so that all states in the region have access to the stable and continuous energy supply, essential for economic development and social stability. b. Establish integrated regional markets in South East Europe, closely linked to the internal energy market ofthe European Union, and complying with the rules applicable within the European Union. c. Enhance the energy security of South East Europe and the European Union by providing incentives to connect the Balkans to Caspian and North African gas reserves. d. Improve the environmental situation in relation to energy in the region. 23. The Member States (Regional Members) are committing themselves under the Energy Community Treaty inter alia to: a. Implement the EC Directives 2003/54/EC (electricity) and 2003/55/EC (gas) ofthe European Parliament and ofthe Council, dated June 26,2003, within twelve months of the entry into force ofthe ECSEE Treaty. b. Implement the acquis communautaire on Environment in compliance with a timetable set out in the Treaty. c. Endeavor to accede to the Kyoto Protocol if they have not already signed. d. Ensure that the eligible customers within the meaning ofthe European Community Directives 2003/54/EC and 2003/55/EC are: from January 1, 2008, all non-household customers; and from January 1, 2015, all customers. 24. The Bank supports the Energy Community in a number ofways including: i)through active participation in its implementation organization (described in Annex 1, Section 1); ii)analytical work including the March 2004 framework paper, the completed generation investment study and the recently completed gasification study; and iii)country-level policy dialogue and project work. The ongoing regional investment and technical assistance support under the ECSEE APL is also an integral element ofthis comprehensive program of support. 25. The objective of the ECSEE APL program is the development of a hnctioning regional electricity market in South East Europe and its integration into the internal electricity market of the European Union, through the implementation of priority investments supporting electricity market and power system operations in electricity generation, transmission and distribution as well as technical assistance for institutionalhystems development and project preparation and implementation. 26. The Regional Context: Albania and the Energy Community. Reducing the growing gap between energy supply and demand is crucial to encourage stronger economic development throughout South East Europe. Recognizing the benefits of a regional, rather than national, approach to energy issues, nations and temtories in the region signed the Treaty Establishing the Energy Community in October 2005.
A list of projects under the program is provided in Annex 1.
6 27. In addition to improving efficiency, the region-wide institutional framework for electricity trading is expected to expand the region's generation mix, improve overall energy conservation and efficiency, reduce an excessively high energy intensity of production compared to international norms, and strengthen national institutions and adopt legislation and regulations to EU standards. The Treaty has particularly provided a mechanism to eventually bring regional environmental standards as they relate to energy issues to a point consistent with the EU acquis communautaire, including the application ofEU directives to new generation plants. 28. Recognizing the importance of supporting the development ofthe regional electricity market in South East Europe, the Board in January 2005 approved a $1 billion horizontal APL facility to support countries to better integrate into the regional energy market. 29. ECSEE APLS-Dam Safety Project The dam safety project's role in ensuring sustained operation of Albania's large hydropower plants is important for successful hctioning of the SEE regional energy market, and the project meets the eligibility requiremend of the ECSEE APL program. The plants' total capacity of 1,450 MW is sufficiently large that if a big proportion of it became unavailable this would aggravate the existing power shortage in the region and push up prices of regionally traded electricity just as the recent closure of a 1,000 MW nuclear power station in Bulgaria did, even though this closure had been planned for many years. Albania's substantial water storage capacity also allows these plants to be reserved for peak power use where complementary thermal power generation is available to cover base and shoulder loads. Such thermal power capacity is available in the region, but is absent in Albania pending the coming into operation ofthe 100 MW Vlore combined-cycle thermal power plant in 2009. Optimal operation ofAlbania's hydropower plants for the region as well as for the country for the foreseeable future will require export of power during peak periods and import during off-peak periods. 30. Albania is in compliance with the Energy Treaty's requirements. It has a hctioning independent electricity regulator, a separate transmission system operator and it has granted eligibility status to all non-household customers. C. Project development objective and key indicators 31. The development objectives ofthe ECSEE APL5 Dam Safety project are to: (i)contribute to safeguarding the major hydroelectric dams of Albania; and (ii)improve their operational efficiency and enhance the stability of power supply for the regional electricity market. The proposed project supports the development of the Energy Community in accordance with the objectives ofthe Energy Community APL. 32. The project's main impact would be to prevent a possible catastrophe resulting from a dam failure. Such a catastrophe could result in significant loss of life and damage to property in downstream areas. It would also cause a major and prolonged fall in hydropower production that would severely affect the entire population of Albania and would likely significantly increase electricity prices in the whole SEE region. Poor and vulnerable people in the region would likely suffer disproportionately from any such electricity price increases. 33. In addition, the project would assist Albania to maximize its benefits from existing hydropower by improving operational practices of existing facilities and enabling more effective participation in the regional electricity market. The project will also promote private sector
The requirements are listed in Annex 1.
7 investment in hydropower by collecting, organizing, and making available, better data and studies on the country’s hydropower potential. 34. The key indicators would be: (i)total safeguarded dams and generation capacity; (ii) increased electricity output due to reduced water leakages and equipment rehabilitation; (iii) increased value of electricity output as a result of the use of improved reservoir optimization procedures; (iv) maintenance ofsystem load frequency variations within international norms; (v) preparation by KESH of financial statements in accordance with International Financial Reporting Standards (IFRS); (vi) hydropower development studies that lead to competitions for award ofconcessions for projects judged to be economic. D. Project components 35.Eligible ECSEE APL Project Components The Bank’s March 2004 framework paper concluded that significant investments in power generation, transmission and distribution and technical assistance are required for a well-functioning power market. Priority investments and technical assistance would be financed under the ECSEE APL program so that the Energy Community’s Regional Members can effectively participate in the regional electricity market (Annex 1, Section 2). 36. ECSEE APLS-Dam Safety Project The 2006 Dam Safety Survey recommended a series of investments to improve dam safety and operation and categorized them into: (i)very high priority, high priority and medium priority (Euro 28 million); and (ii)conditional high priority (Euro 153 million) measures. The project will finance those of the very high priority, high priority and medium priority investments that are the most precisely defined and need relatively little further study. In addition, it will finance several related high-priority investments not covered by the Dam Safety Survey including: rehabilitation of spillway no. 3 at Koman; rehabilitation of electromechanical equipment at Koman; and implementation of a load frequency control system at Vau iDejes and Fierza. The project will strengthen the institutional capacity of KESH to improve its water management practices and optimize the use of its hydropower assets. In addition it will include technical assistance for: hydrology analysis and water management; studies for new hydropower development; and financial management capacity building. 37. Some of the very high, high and medium priority investments need additional time and financing to be better defined, so they will be studied firther during project implementation. EBRD and SECO have agreed, in principle, to provide financing for additional safety investments of up to Euro 30 million. Other conditional high priority investments, which might involve the construction of additional new spillways require considerable additional analytical work and would be covered under possible future projects --if proven to be necessary. The implication ofthis approach is that the present project will improve dam safety considerably, but more investments may be needed to ensure safety in full accordance with current European safety criteria. 38. The detailed feasibility study of these interventions has started (financed by SECO) and serves as the basis for the preparation ofthe project. An already approved PHRD grant was used for the preparation of the social and environmental assessment of the project investments. The need and alternative approaches for the higher cost category investments (see ii above, conditional priority) will be assessed during project implementation.
8 39. The project consists oftwo main components: (1) physical infrastructure investments; and (2) technical as sis tanc e. 40. Component 1: Physical Infrastructure Investments These items include: (a) Remedial Measures of Very High Priority (Euro 3 million): (i) Dam Safety Alarm Systems for Drin and Mat River Basins include the specification and implementation ofwater alarm systems in the Drin and Mat River basins (Euro 2 million); (ii) Dam Monitoring Systems for Drin and Mat River Basins include the specification and implementation of dam monitoring equipment including Geographical Positioning System (GPS), and implementation of a data acquisition system (Euro 1 million). (b) Remedial Measures of High Priority (Euro 6.5 million): (i) Fierza Dam - Rehabilitation of spillway no. 3 (Euro 3 million); (ii) Fierza and Koman Geological Monitoring System- include the specification and implementation of movement/landslide alarm systems linked to GPS for identified potential geological slip zones (Euro 1.6 million); (iii) Vau i Dejes - Spillway rehabilitations and maintenance.(Euro 1.8 million); (iv) KESH Dam Safety Department- equipment for data archives, monitoring and documentation. (Euro 0.1 million). IC)Remedial Measures of Medium Priority and Operational Improvements (Euro 10.8 million): (i) Koman Dam - General rehabilitation of spillways 3 and 4 --gate seals, stop-logs, as well as frames, cylinders and hydraulic power, and modification of outlet for spillway no. 4 (Euro 3 million); (ii) Koman Hydropower Plant - rehabilitation of electromechanical equipment (Euro 6.3 million); (iii) Vau i Dejes and Fierza Dams - Implementation of a Load Frequency Control system to allow for the integration ofAlbania’s electricity system with UCTE (Euro 1.5 million).
41. Component 2: Technical Assistance and Training (a) Hvdroloav Analysis and Water Management (Eurol.5 million). The project will provide technical assistance to develop and train KESH on an integrated water resources management approach for the management of the Drin and Mat river basins and the optimization of power dispatching and water resource management. Because of the lack of maintenance and institutional weakening, water management practices in Albania have been neglected and significant gaps created. The technical assistance is designed to: (i)improve the quality and availability of hydrological data, analysis and modeling; (ii)study the possibility of changes to operating rules to provide increased economic, environmental and social benefits, and (iii) incorporate implications of climate change in terms of hydrological profiles. Some of this analytical work has started during project preparation, with support from SECO. This work will continue during project implementation. (b) Proiect Implementation Consultants (Euro 2.5 million). The project will require specialized consultants during its implementation to assist KESH with procurement, design and supervision ofvarious contracts. IC)Institutional Strengthening (Euro 0.4 million). The development of a Safety ofDams culture within KESH and the institutional strengthening of the Albanian Commission of Large Dams (AlbCOLD) is a requirement for the sustainability and long-term implementation of safety measures. Technical assistance will be provided to prepare an emergency preparedness plan and, to strengthen the capacities of KESH’s dam safety department and AlbCOLD. This technical assistance will also investigate options for KESH Gen’s future structure and ownership, and assist KESH Gen to establish a new organization structure, prepare a human resources plan and
9 business procedures, and assist in other activities related to establishment of a separaie company that will operate in accordance with the Albanian Market Model. Jd) Studies for Further Hydropower Development (Euro 2 million). Albania has considerable undeveloped hydropower potential that when developed would provide additional capacity to the country and the regional electricity system. Around the Drin River area there seems to be potential for fbrther development, or pumped-storage options. To address the initial upstream costs of feasibility studies this technical assistance component will finance detailed feasibility studies for new hydropower development in Albania. (e) Financial Management Capacity Building for KESH (Euro 0.5 million). KESH, in compliance with the Energy Community Treaty is undergoing further unbundling. The TSO became a separate entity in 2006, while a Distribution System Operator (DSO) company was instituted legally in 2007. The TSO is currently fully owned by KESH, while the DSO is in the process ofprivatization. These changes have created a need for better financial reporting under International Financial Reporting Standards (IFRS) to improve sector monitoring and regulation. However, there is limited capacity in KESH to monitor its financial transactions and prepare adequate financial statements. This component will address these shortcomings. It will include establishing a new financial management system in KESH Gen and contribute to the allocation ofassets and liabilities and creation ofan opening balance sheet. Jf)Safety ofDams Experts Panel (Euro 0.2 million). An independent panel of experts is required to oversee the design and implementation of various interventions in the project dams as per Safety of Dams safeguards policy. This component will finance the work of the independent experts. 42. A detailed description of the project is presented in Annex 4. EBRD and SECO have indicated willingness to provide parallel financing for the project. At this time it is not possible to allocate individual project sub-components between IDA, EBRD and SECO. In addition, not all of the investments expected to be financed by EBRD are sufficiently well defined yet to be included in the project description and project cost table. All ofthem are a priority for the safety of the dams on the Drin and Mat Rivers. IDA would have the right to resort to its remedies if EBRD and SECO do not approve their financing by December 2009. E. Lessons learned and reflected in the project design 43. ECSEE APL Program A key lesson learned from other markets, including NordPool, and from the association ofEuropean Transmission System Operators (ETSO) is that the progressive integration of energy markets in SEE and the implementation of common security of supply policies requires that close attention be paid to the design and operation of subsidiary electricity markets (e.g. balancing and ancillary services) which are best administered by TSOs. The Energy Community’s implementation organization therefore includes the SEE Transmission System Operators Task Force, which interacts with ETSO and UCTE to ensure smooth integration and coordination. The role ofthe Energy Community Task Force of TSOs is critical in all phases ofthe Energy Community’s development and operation. 44. Political commitment and adequate financial support are key ingredients ofsuccessful reform programs. The Energy Community’s development is premised on the political commitment of the SEE countries and is backed by an exceptionally strong donor involvement. 45. ECSEE APLS-Dam Safety Project The main lesson learned is that the most intractable problem in the power sector since 1992 has been the difficulty of reducing power distribution
10 losses and improving collections. The Bank has attempted to assist in addressing this problem under previous and ongoing projects, since 2001 in the context of the annually updated Power Sector Action Plan. The Government’s current approach to the problem is based on the planned privatization of the power distribution company. The new buyer will face progressively more difficult loss reduction targets with each passing year. The distribution company will be required to purchase the energy to cover its distribution losses on the market, which in practice will mean paying the high price of imported electricity. It will be compensated for the cost of the energy needed to cover the losses up to the target level, but will have to absorb the cost of buying the energy to cover any additional losses in excess of the target. The company will face correspondingly difficult collections targets. 46. In view of the Government’s intention to privatize the power distribution company, the present project does not include loss reduction and collection improvement in its development objectives. However, even if the privatization is successful, the project could be affected by continuing financial difficulties for KESH if ERE fails to increase retail tariffs sufficiently to cover the costs of KESH Gen, the wholesale public supplier and the TSO as well as the distribution company. Large increases are needed because of the after-effects of the drought in 2007, the doubling of electricity import prices since 2005, the need to ensure an adequate rate of return on capital of the privatized distribution company, and since improvements in reducing distribution losses and increasing collections will take several years to complete. Since the distribution coinpany will need to have its full cost and satisfactory rate of return covered, the rest of KESH would have to absorb all the financial losses of the sector resulting from insufficient tariffs. The financial squeeze would be worse in dry years until a satisfactory mechanism is implemented to give the sector enough resources to buy the extra electricity imports needed in dry years. ERE’Stariff methodologies provide for such a mechanism, but it has not yet been introduced. A possible response of KESH to financial shortfalls is to reduce electricity imports needed to supply tariff customers. However, KESH Gen could end up not getting enough revenue to cover its costs, which could adversely affect maintenance at the dams. 47. Fortunately, maintenance costs at the dams are low. The project will provide several years of spare parts for electro-mechanical equipment, thereby reducing them further. The technical assistance for establishing a new organization structure at KESH Gen should also identify opportunities for reducing staff requirements. Since a general goal of the project is to emphasize the importance of ensuring dam safety, KESH is expected to ensure that enough resources are always provided for continuing maintenance and monitoring. 48. Earlier efforts by KESH to introduce a new financial management system with IDA financing were not successful. However, KESH realizes the importance ofmaking a new effort. A new system will be needed to enable KESH, the TSO and KESH Gen to meet the data requirements of ERE and participate in the regional market. One reason for the failure of the previous efforts was the difficulty of introducing the new system in all of the many local distribution entities. Since distribution has been separated from KESH and is expected to be privatized soon establishment ofa new financial management system for it would not be covered under the project. 49. A capable project management unit is needed for efficient procurement and implementation ofthe investments and technical assistance. The project management unit (PMU) within KESH that has handled the previous IDA financed power projects satisfactorily would continue for the proposed project through to the closing date.
11 50. The implementation ofthe sub-component to rehabilitate the electromechanical equipment at Koman will benefit greatly from the experience ofrehabilitating the corresponding equipment at the other hydropower plants on the Drin River under the Drin Cascade Rehabilitation Project (See Annex 2). This project was handled successfully by the PMU of KESH’s Generation division. Koman was not included in that project since it was new when the project was approved in 1994 and did not require rehabilitation. F. Alternatives considered and reasons for rejection 51. ECSEE APL Program A regional approach and the use of the APL instrument give the Bank the flexibility to match its commitments to the pace of its clients. The rationale for this approach in comparison with alternatives such as self-standing non-APL investment projects in individual countries is presented in detail in the Project Appraisal Document for the ECSEE APL-Romania Project approved by the Bank’s Executive Directors on January 27,2005.
52. ECSEE APLS-Dam Safety Project An alternative option would be a larger project that would include as well all the investments proposed for financing by EBRD and all the remedial measures of conditional priority identified in the Dam Safety Survey. If all of these measures turn out to be required, their total cost would be about Euro 173 million. However, this option was rejected because to analyze adequately the hydrological capacities and risks for the Drin river dams, significant investments are needed to collect and organize data. Moreover, the study period and potential alternatives would take a significant amount of time and resources that would postpone the project significantly even though a series of urgent measures have already been identified. The remaining high priority and conditional priority measures and their potential alternatives will be studied in detail during project implementation. 111. IMPLEMENTATION
A. Partnership arrangements 53. ECSEE APL Program First and foremost, the Energy Community is a partnership among the SEE countries. They have acknowledged that solutions to pressing regional issues based on isolated national markets are neither capable nor desirable as a means to attempt to close investment gaps and emerging demand and supply imbalances. Second, the Energy Community is a partnership between the SEE countries and the European Union with both the countries and the EU signing the Treaty. Finally, the Energy Community is a partnership between the SEE countries, the donors, and financial institutions including the Bank. Financial institutions and bilateral donors include the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the German Development Bank (KfW), the United States Agency for International Development (USAID), the Canadian International Development Agency (CIDA), and France, Greece, Italy, and Switzerland.
54. ECSEE APLS-Dam Safety Project Parallel financing of up to Euro 30 million has been agreed, in principle, by SECO and EBRD. IDA would have the right to resort to its remedies if the parallel financing is not approved by December 2009.
B. Institutional and implementation arrangements 55. ECSEE APL Program A comprehensive coordination and implementation mechanism has been established for the development of the Energy Community. The mechanism covers and
12 brings together political and administrative leadership, regulators, transmission system operators and other utilities, the European Commission, international financial institutions and bilateral donors in the Energy Community’s Ministerial Council, Permanent High-level Group, Task Forces, and the Forum. This mechanism is detailed in Annex 1, Section 1.
56. ECSEE APLS-Dam Safety Project Albania’s power sector institutional strengthening and reform measures are based on: (i)a rolling multi-year Power Sector Action Plan focusing on measures to strengthen KESH’s performance, which was first adopted by the Government and KESH in January 2001, with full support from the donor community, and updated in each subsequent year; (ii)the Law on Regulation of the Electricity Sector enacted in August 2003, which has served as the basis for strengthening ERE; (iii)the Energy Strategy adopted by the Government in June 2003, with a draft updated Strategy completed in mid-2007; (iv) the AMM approved by the Government in 2007 and as may be amended in preparation for privatization of the DSO; and (v) Albania’s commitments under the Energy Treaty (2005), which envisages sector restructuring based on the provisions of the EC Directives 2003/54/EC. Details of the reforms undertaken and recent performance ofthe power sector are given in Annex 1, Section 3. 57. Of the total project cost of US$ 56.8 million equivalent the IDA credit would finance US$ 35.3 million equivalent. Co-financing ofUS$ 5 million equivalent would be provided by KESH. Parallel financing of up to US$ 41 equivalent would be provided by SECO and the EBRD for some sub-components to be defined later. 58. The IDA credit would be lent to Albania for 20 years with a 10-year grace period and at the standard IDA service charge. The credit would be re-lent to KESH on the same terms since dam safety is critically important for Albania quite apart from its importance for power generation. KESH may re-lend the credit to KESH Gen when it is established as a separate entity. 59. The proposed project would be implemented between September 2008 and September 2013, with a closing date of December 31, 2013. Management of the implementation of the project would be carried out by KESH, with the Project Management Unit (PMU) responsible for implementation of the Power Sector Generation and Restructuring Project and the ECSEE APL2-Albania project continuing for the proposed project. Implementation Consultants under the project would help the PMU prepare the bidding documents and monitor implementation with the Bank’s policies for procurement ofgoods and services and selection ofconsultants. C. Monitoring and evaluation of outcomes/results
60. ECSEE APL Program At the regional level, the ECSEE APL program is included in the established mechanism for Energy Community coordination, the Ministerial Council, Permanent High-level Group, Task Forces, and the Forum (Annex 1, Section 1). The project will benefit from this elaborate, active and well-functioning mechanism for coordination, monitoring and evaluation. The Energy Community’s Regulatory Secretariat will provide an institutional mechanism for the regular monitoring ofthe countries’ performance against agreed benchmarks. At the country level, investment projects will be included in national programs which will be monitored by the coordination mechanism. The Bank will continue to participate in the Athens process including the Forum and will also directly supervise the individual country projects. 61. ECSEE APLS-Dam Safety Project Monitoring ofthe project would be carried out through the normal review procedures for procurement, regular supervision missions, the Financial
13 Monitoring Reports (FMRs), the independent annual financial audits of the project and of KESH’s accounts, possible reports on the power sector by Albanian authorities, and reports prepared under technical assistance financed by IDA or other lenders to the power sector. Consultants hired to provide assistance for procurement and supervision of project implementation would monitor implementation of the investments at all stages, while the independent panel of experts would monitor all dam safety specific components. IDA would also carry out a mid-tern review by June 201 1, As well as the topics covered by the FMRs the mid-term review would include a review ofthe overall institutional and financial performance of the sector. The review would identify any additional measures to be taken to ensure the efficient completion ofthe project and achievement ofits objectives. D. Sustainability 62. ECSEE APL Program The Energy Community market vision and sustainability are discussed in Annex 1, in terns of ECSEE market participants, market sophistication, competition and integration with the European Union internal energy market. It is important to note that though additional transmission links are required and will be developed, SEE (except Turkey) was synchronously interconnected with the main European power system on October 10, 2004. Turkey is also expected to be interconnected with UCTE in the near future. Through integration, the region secures access to a major trading partner and an important import source to meet possible electricity shortfalls and emergency support. This highlights the electricity/economy dimension in the Energy Community’s integration into the EU’s internal energy market. 63. ECSEE APLS-Dam Safety Project Sustainability of the project’s investments and implementation of the technical assistance will depend on the successful implementation, subsequent maintenance, and continuation ofthe associated organizational measures to maintain dam safety, improve water management and strengthen KESH institutionally. Albania’s commitments to the Energy Community, the significant value of the dams for the country’s supply, and Albania’s interest in eventually joining the EU provide a strong incentive to continue with the reform process. E. Critical risks and possible controversial aspects
64. ECSEE APL Program The ECSEE APL program has been developed and is being implemented through a comprehensive coordination and implementation mechanism. It has gone through extensive discussion and debate. The Bank’s work in the Energy Community context, published in the March 2004 framework paper on development ofregional energy trade in SEE, has highlighted risks and contributed to risk mitigation measures. Risks are being minimized by adopting a gradual approach to market opening and a voluntary approach to trading. Though the market is being opened, meaning an increasing number of electricity consumers will become eligible to choose their electricity supplier, trading is not mandatory but voluntary between willing sellers and willing buyers - countries and customers in individual countries need not and are not expected to move at the same pace.
65. The pace of liberalization may nevertheless trigger controversy. Adjustments can however, be accommodated to some extent in the Energy Community Treaty, including derogations and subsequent modifications in accordance with the practice of the European Commission. Other potential Energy Community-related controversies include the development of new generation capacity, progressive upgrading and implementation of environmental legislation and impacts of
14 competitive pressures particularly on higher cost and less competitive suppliers and the less attractiveheliable customers. It must be emphasized that the SEE region faces a fundamental risk ofnot being able to meet the growing demand for electricity. If such a situation develops, it would threaten the economic growth prospects and affect the quality of life in the region. The Energy Community is regarded as the best possible mitigation measure for this risk. Through the Energy Community, a regional market of countries with harmonized and EU-compatible legislation and institutions is underpinned by a legally binding international Treaty. The region should therefore develop an EU-compatible regional market and thereby represent a much larger and more attractive investment destination for prospective investors.
66. ECSEE APLS-Dam Safety Project The electricity sector in Albania suffers from chronic underperformance stemming from high losses and insufficient collections in distribution. This undermines the financial sustainability of the sector and is one of the reasons that the country’s dams have been neglected. Funding for future maintenance and operations of the hydroelectric plants after project implementation may be limited, unless the distribution sector improves. The country is currently in the process of privatizing the distribution sector with IFC’s advisory assistance; a successful privatization will diminish this risk. Should the privatization be postponed, this risk can be mitigated through the implementation of the annually updated Power Sector Action Plans and the approval by ERE of the tariff increases shown as being required in the Action Plans. These mitigation measures are considered to reduce this risk from substantial to moderate. In addition, the AMM provides for the option of creating a separate generation company responsible for the hydropower plants. ERE has drafted a separate tariff methodology for sales by this company. The detailed investment, operating and monitoring costs to be provided by the Dam Safety Action Plan and the feasibility study for the project will be necessary data to be included in such tariff calculations.
67. Project implementation may be delayed by unpredictable weather events and postponements of needed temporary shutdowns to carry out rehabilitation works. Shutdowns would not likely cause a significant loss in production. The consequences would mainly be either to advance the production by lowering upstream reservoir levels or postponing production by raising reservoir levels. However, even changes in timing ofproduction could prove difficult in reality depending on whether there are power shortages or surpluses within Albania at the times the shutdowns are scheduled to take place.
68. The dams may continue to be inadequately maintained and monitored during project implementation and operation. This risk will be addressed through the implementation of maintenance and monitoring measures specified in a series of Dam Safety measures and the overall institutional strengthening measures. The adequacy ofthe power generation tariff to pay for maintenance and monitoring would be reviewed during project implementation.
F. Loadcredit conditions and covenants 69. ECSEE APL Program As detailed in Annex 1 Section 2, the ECSEE APL is directly linked to the countries’ commitments under the Treaty. No other triggers would be applied.
70. ECSEE APLS-Dam Safety Project Albania already meets the initial ECSEE conditions and the ECSEE APLS-Dam Safety project complies with Bank safeguard policies. The specific credit conditions applicable to the project are given in Annex 6.
15 IV. APPRAISAL SUMMARY
A. Economic and financial analyses 71. Project Economic Analysis The estimated net present value of the project is Lek 3,900 million at an assumed discount rate of 12%, and the estimated internal economic rate ofreturn is 47%. 72. The project would bring about three important benefits: (i)improvement of dam safety; (ii) improved efficiency of operation; and (iii)firther integration within the regional electricity market. The project also offers significant global economic benefits in the form of reduced greenhouse gas (GHG) emissions related to the efficiency gains and increased hydro power capacity through the rehabilitation of existing dams. Emission reductions achieved through project measures could be eligible for trade under Clean Development Mechanism and will provide an additional income stream to be used to finance activities funded both within and beyond the scope of this project. By converting the global economic benefits into financial returns through a carbon finance project the financial rate ofreturn for the project would improve firther. 73. It was not considered feasible to undertake a cost-benefit analysis ofthe first benefit because ofthe difficulty ofestimating the probability of failure ofone or more ofthe dams in the absence of the project as well as the difficulty of measuring the consequences of failure, which would include destruction of power sector and other infrastructure, loss of energy production until the damaged facilities are repaired, possible loss ofnon-power production and possible considerable loss of life due to flooding. The investments designed to improve dam safety for which cost- benefit analyses will not be carried out include: dam safety alarm systems for the Drin and Mat River Basins (Euro 2 million); dam monitoring systems for the Drin and Mat River Basins (Euro 1 million); Fierza and Koman geological monitoring system (Euro 1.6 million); and KESH dam safety department equipment for data archives (Euro 0.1 million). The monitoring and safety alarm systems included in the project are now considered to be normal requirements at large dams everywhere. 74. Cost-benefit analyses were carried out for the investment and technical assistance sub- components designed to improve efficiency of operation. Three of the investment sub- components would involve elimination of water leakages, which would result in increased electricity production. These investments would also provide dam safety benefits, but these benefits are not being included in the economic analysis. These sub-components include: (i) Fierza - rehabilitation of spillway No. 3 (Euro 3 million); (ii)Vau i Dejes - spillway rehabilitation and maintenance stop-logs (Euro 1.8 million); and (iii)Koman - general rehabilitation ofspillways 3 and 4 -- seals, as well as frames, cylinders and hydraulic power units (Euro 3 million). The fourth sub-component that would improve efficiency of operation and be included in the economic analysis is Koman - rehabilitation of electromechanical equipment (Euro 6.3 million). This sub-component would result in increased electricity production from the rehabilitated units. The fifth sub-component included in the economic analysis is the technical assistance for hydrology analysis and water management (Euro 1.5 million). Its benefit would consist of reduced domestic plus import costs of supply resulting from improved reservoir operations.
16 75. The other sub-components for which it would not be feasible to do a cost-benefit analysis are the implementation of a load frequency control system at Vau i Dejes and Fierza (Euro 1.5 million), which is needed for integration with the regional market, and the other technical assistance sub-components with total estimated cost of Euro 5.6 million. The economic analysis was done for 57% ofthe total project cost (excluding contingencies and the as yet to be included items to be financed by EBRD). 76. While the overall net benefits are very high, the rates ofreturn of the spillway rehabilitation sub-components are all below 10%. However, including the dam safety benefits, if they could be measured, would raise the rates ofreturn for these items to highly satisfactory levels. The rate of return for rehabilitation of electromechanical equipment at Koman is 15%, which is satisfactory. The rate for improved reservoir management is an enormous 217%. This reflects the low cost of the computer modeling needed to optimize reservoir operations procedures. Increasing average production by even one-half percentage point would give a favorable rate ofreturn, but the likely increase is much larger, assuming the procedures determined by the model are implemented in practice. 77. The detailed economic analysis ofthe project is presented in Annex 9. B. Technical 78. The Dam Safety Survey identified the following hazards and deficiencies:
A number of natural hazards, such as potential rock-falls, faults located close to the dam foundations, floods, earthquakes, etc. threaten the safety ofthe dams. The structures designed in accordance with the prevailing hydraulic and seismic standards may be deficient when today’s internationally recognized guidelines are applied. The dams’ civil structures and some of the hydro-mechanical equipment have not been properly maintained. Inadequate budgets have been allocated for the periodic maintenance works. The dam monitoring systems are generally in an unsatisfactory condition. Most of the existing instruments are no longer working due to poor maintenance. Moreover the recorded data are not evaluated regularly. KESH has an outdated dam safety concept and an ineffective dam safety organization. The dam safety rules are outdated and the dams do not satisfy the basic safety criteria used in Switzerland and other European countries. The number of trained and experienced hydropower engineers is already insufficient. Furthermore, the number ofqualified staff will continue to decrease due to aging.
79. The Survey report “concluded that the present state of the dam safety is uncertain, and a disaster of massive proportions could be considered as possible in the not too distant hture if matters are left to deteriorate hrther.”
80. The Survey report recommended institutional measures to improve monitoring ofdam safety and maintenance at the dams and to create contingency plans to address possible emergencies. These recommendations are being implemented through the institutional plan approved by METE in 2007. The Survey report also presented a set of remedial investments. Many of the very high, high and medium priority investments would be financed under the project by IDA,
17 SECO, and KESH, and the rest would be financed by EBRD. The report also made recommendations for further study of these measures as well as of the conditional priority measures. This work is being carried out in the feasibility study financed by SECO and will be complemented during project implementation by the project’s technical assistance components. 81. The project includes three investment sub-components that were not covered by the Dam Safety Survey, but where subsequently deemed as priority investments, rehabilitation of spillways nos. 3 and 4 at Koman, rehabilitation of electromechanical equipment at Koman, and load frequency control at Vau iDejes and Fierza. 82. The rehabilitation of spillways nos. 3 at Fierza and Koman will involve repairs to eliminate water leakages. More investigation will be required to determine the best ways to carry out this sub-component, in particular how to address the problem of pre-existing damage to a spillway gate frame. Pending the results of this study, the cost estimate of this sub-component is subject to greater uncertainty than the estimates for the spillway repairs at Fierza and Vau iDejes. 83. Koman’s four Francis vertical generators of 150 MW each were not covered by the Drin Cascade Rehabilitation Project since they had been recently installed (between 1985 and 1988) at the time that project was prepared. These units have now reached the stage where rehabilitation of some equipment is needed. Consultants have evaluated some ofthe equipment and assigned points in accordance with the following scheme: 0 points: Equipment is not reliable and does not fulfill the needs; 5 points: Condition is acceptable, wearing is visible, will reach lifetime within next 10 years; 10 points: Equipment is reliable, small risk for outage, will reach the theoretical lifetime. The results were as follows: turbine inlet valve - 2 points; cooling water and turbine shaft seal systems - 2 points; turbine governor and interfaces: - 4 points; static excitation systems: - 4 points; relay protection systems: 8 points; generator fire fighting systems: - 1 point; unit level control systems: 4 points; plant level control system: - 3 points; and generator transformer fire fighting systems: 0 points. The rehabilitation works are based on these results. 84. Albania is the only country in the Balkans that is not a member ofUCTE. One reason is that the Albanian power system is unable to maintain load frequency within UCTE norms. This failure jeopardizes electricity trade between Albania and its neighbors. The frequency control investments at Vau iDejes and Fierza are designed to remedy this shortcoming. C. Fiduciary 85. Procurement. All procurement activities would be carried out by the PMU ofKESH that has carried out procurement for the previous post-war IDA-financed power projects. A procurement capacity assessment has been carried out as part of preparation. Procurement of IDA-financed components for the proposed project would be camed out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated May 2004, and revised October 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 and revised October 2006, and the provisions stipulated in the Credit Agreement. More detailed procurement arrangements can be found in Annex 8.
Financial Management and Disbursement. The World Bank has two on-going projects with KESH, which are supervised closely. The project will follow the existing setup for financial management arrangements for project specific activities, while a specific technical assistance component will focus on improving KESH’s overall financial management reporting. The
18 financial management (FM) finctions of the project will be handled by the PMU within KESH, which will be responsible for the flow of funds, accounting, budgeting, reporting, and auditing. 86. Financial Management Risk at the Project Level. The FM arrangements of PMU have been reviewed periodically as part of the on-going projects supervisions and found acceptable. The FM arrangements for Dam Safety project were assessed to be satisfactory for the project implementation. The FM arrangements of the project are going to be the same as for the on- going projects which are acceptable to the Bank. The overall FM risk for the project after mitigation measures is moderate. 87. Financial Management Risk at the Company Level (see also Annex 7). KESH is legally obliged to prepare its financial statements under IFRS, while an action plan to improve its FMS on a number of issues was developed in 2007 and is currently under implementation. The risk associated with external audit for the company is considered substantial. 88. Financial Management Risk at the Country Level. Corruption in Albania remains a serious and widespread problem, and the corruption risk is considered high. Adequate mitigation measures are incorporated in the project, and Bank staff will closely monitor performance during implementation. These mitigation actions can be summarized as follows: (a) the project will establish a formal internal control framework described in the Financial Management Manual (FMM); (b) hds flow mechanism agreed will be enforced; (c) the project and the entity financial statements will be audited by independent auditors and on terms acceptable to the Bank; (d) regular FM supervision and procurement prior and post reviews will be conducted to look for any indication ofthe corruption risk. D. Social 89. The project would have beneficial social impacts by improving the safety of persons living downstream ofthe dams on the Drin and Mat Rivers and by reducing the probability of the load shedding that would be the consequence of lost production due to damages at dams caused by overtopping of dams. There is, however, some risk of electricity shortages during periods when hydropower plants may have to be shut down for repairs financed under the project. This risk would be alleviated by using the technical assistance component on water management to minimize such disruptions. Albania’s transmission constraints will be mostly removed by 2009, while internal thermal generation will also be increased due to the Vlore thermal power plant coming to operation. 90. Low-income consumers benefit from the social subsidy scheme established in 2006 to compensate targeted socially vulnerable groups for the increase in the price of electricity for monthly consumption below 210 kWh from Lek 4.5kWh to Lek 7kWh. Only those consumers in the targeted groups that are confirmed by KESH to be paying their electricity bills are allowed to receive the subsidy. These consumers were unlikely to have been adversely affected by the 15% overall tariff increase that occurred in February 2008, since there was no increase for household consumption below 300 kWmonth. Not many vulnerable households would buy more than 300 kWh per month. 91. With respect to consumer protection, KESH has entered into new contracts with its customers, under which KESH and these customers are viewed as equal partners. The contract terms were approved by ERE. Consumers also have the possibility to pay their electricity bills at commercial banks. In addition, KESH is implementing a modified system of complaint
19 procedures in accordance with ERE rules. Under the PSGRP, various aspects of KESH’s relationship with its consumers are being assessed through consumer satisfaction surveys and focus group discussions. This activity will overlap a part of the implementation period of the ECSEE APL5-Dam Safety Project. E. Environment 92. The project is rated category B. The program’s environmental impact is overall positive as it aims to prevent a dam failure and any accompanying environmental disaster. Its focus on improving hydrological analysis and monitoring and better water management will result in further positive environmental impacts. 93. The project’s physical infrastructure investments are oflimited scope and will not change the existing levels of the dams. Potential environmental impacts concern mainly the management and disposal of limited waste during rehabilitation works. Changes in reservoir levels during plant shutdowns for rehabilitation works would be within normal operating levels. Any further critical physical infrastructure interventions that will be studied and specified during implementation and financed by EBRD will be evaluated from an environmental perspective before the EBRD project is approved. F. Safeguard policies
Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [X 1 [I Natural Habitats (OPBP 4.04) [I [X 1 Pest Management (OP 4.09) [I [X 1 Physical Cultural Resources (OPBP 4.1 1) [I [X 1 Involuntary Resettlement (OPBP 4.12) [I [XI Indigenous Peoples (OPBP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety ofDams (OPBP 4.37) [X 1 [I Projects in Disputed Areas (OPBP 7.60)* [I [X 1 Projects on International Waterways (OPBP 7.50) [XI [I
94. The key objective of the project is to enhance safety of energy dams managed by KESH along the Drin and Mat cascades. Provisions of OP4.37 (Safety ofDams) are fully incorporated in the project. At the same time, in addition to those provisions, the project features additional elements that are beyond the strict requirements of OP4.37. The following table illustrates the above by showing which elements of the project represent compliance with OP4.37, and which ones are additional ones. The latter have been considered necessary to achieve, and sustain, project’s objectives.
* By supporting the proposedproject, the Bank does not intend to prejudice the final determination of the parties‘ claims on the disputed areas
20 95. While OP 4.12 is currently not triggered, there is a possibility that it would be triggered once the additional dam safety measures under the Project, to be financed by EBRD and SECO, have been identified. Should, in the opinion of the Bank, such activities trigger OP 4.12, the necessary steps will be taken by the Borrower and the PIE in order to comply with OP 4.12 prior to the commencement of procurement for such activities. The Project Agreement includes a legal covenant to this effect.
G. Policy Exceptions and Readiness
96. Exception to the Notification Requirement under OP 7.50 paragraph 7(a) has been requested and approved by Bank Management.
97. All civil works financed under the project are limited to areas on the dams owned by KESH, therefore none of these activities require land acquisition. The locations of the dams and the project works are not associated with any of the illegal and uncontrolled construction activities that sometimes take place elsewhere in Albania. Furthermore, KESH has provided during negotiations a statement attesting their ownership of the land on which these activities will be carried out.
21 Annex 1: Country and Sector or Program Background ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY This Annex has three main sections: 1. The Energy Community - Describes the background and evolution ofthe Energy Community since its inception, and the status ofits agreements and implementation arrangements. 2. The World Bank’s ECSEE-APL Program - Describes the adaptable program loan approved by the World Bank in January 2005 to support countries in meeting obligations and upgrading their power systems to effectively participate in the regional market. This section reviews the status ofthe ECSEE-APL program. 3. Albania Power Sector Issues - Describes the key issues facing the sector and the power sector reforms being implemented by Albania.
98. The Energy Community. In 2002, to pave the way for an efficient regional response to the emerging supply constraints in South Eastern Europe (SEE) and the supply security concerns, the governments of SEE and the European Commission (EC) signed in Athens, Greece, a Memorandum ofUnderstanding on the Regional Electricity Market in South East Europe and its Integration into the European Union Internal Electricity Market. This document is referred to as the Athens Memorandum 2002. With the inclusion ofnatural gas, a more detailed version ofthe memorandum was signed, which is referred to as the Athens Memorandum 2003, and supersedes the 2002 document. The signatories expressed their intent in formalizing their commitments therein. The regional market development process is referred to as the Athens Process. 99. Energy Community Objectives The key objectives ofthe Energy Community are to:
0 Create a stable regulatory and market framework capable of attracting investment to the region in gas networks and power system so that all states in the region have access to the stable and continuous energy supply that is essential for economic development and social stability; 0 Establish an integrated regional market in South East Europe, closely linked to the internal energy market of the European Union, and fully complying with the rules applicable within the European Union; 0 Enhance the energy security of supply of South East Europe and the European Union by providing incentives to connect the Balkans to Caspian, Middle Eastern and North African gas reserves and to exploit indigenous reserves offossil fuels; 0 Improve the environmental situation in relation to energy in the region.
100. Parties involved in the Athens Process include: The European Community. Adhering Parties are Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR of Macedonia, Romania, Serbia, Montenegro, and Turkey. The United Nations Interim Administration in KOSOVO, pursuant to the United Nations Security Council Resolution 1244. The Adhering Parties and the United Nations Interim Administration in Kosovo together are Regional Members (also referred to as the Contracting Parties). EU Member States Austria, Greece, Hungary, Italy, and Slovenia are participants. Any other EU Member States can also request to become participants.
22 Neighboring non-EU Member States can request to participate as observers. Currently, Moldova is participating as an observer. 101. The Treaty establishing the Energy Community (the Treaty). The Council of the EU authorized the European Commission in June 2004 to open negotiations on behalf of the European Union, with SEE countries. The Energy Community’s Ministerial Council concluded on December 13, 2004 that there was broad agreement on the substance of the Treaty and directed their negotiators to conclude remaining details as soon as possible. The Treaty was consequently signed on October 23, 2005 by all ofthe Regional Members (with the exception of Turkey) and by the European Community. The Treaty became effective on July 1, 2006. 102. Energy Community Implementation Mechanism A comprehensive coordination and implementation mechanism has been established that brings together political and administrative leadership, regulators, transmission system operators and other utilities, the European Commission, international financial institutions and bilateral donors. 103. The Energy Community’s Ministerial Council meeting takes place biannually with the participation of the Ministers in charge of Energy of the participating countries and the Commissioner for Energy and Transport of the EC. The Council takes strategic decisions and gives guidance to the Energy Community and, where necessary, formally reviews the conclusions of other Energy Community bodiedmeetings including the Fom. The Council reports annually on the Energy Community’s activities to the European Parliament and to the Parliaments ofthe Regional Members. 104. The Permanent High Level Group is composed of representatives of the Ministries in charge of Energy of the countries and the EC. The group meets, when necessary, on the initiative of the Commission and the Presidency in Office, in order to prepare the agenda for the Ministerial Council and to ensure the follow-up ofits decisions. 105. Two Task Forces have been established for preparatory work and day-to-day coordination and cooperation: (1) the SEE Energy Regulators Task Force, which works closely with the Council ofEuropean Energy Regulators (CEER); and (2) the SEE Transmission System Operators Task Force (SETSO), which interacts with the European Transmission System Operators Group (ETSO) and the Regional Group for Coordination of Electricity Transmission in the Southeast European Interconnected System (SUDEL). 106. The Energy Community Electricity Forum meets at least twice yearly. The Forum comprises representatives of the governments, regulators and transmission system operators of the countries, CEER, SETSO, ETSO, SUDEL, producing companies, consumers, the European Commission, the Stability Pact, and donors including the Bank. 107. Donors are members of the Electricity Forum and usually the donor agencies also meet separately in connection with the Forum meetings. The Stability Pact assigned the role of coordinating the donors to the European Commission in 2001. The Commission retains the overall co-ordination, setting political/technical goals and organizing donors. The Commission was finding an Athens Process secretariat, based in Athens, to support the process, inter alia, benchmarking and monitoring it. 108. The Ministerial Council, the Permanent High Level Group and the Forum have been in existence since 2003 and are formally recognized in the Treaty. The Treaty establishes a Regulatory Board and a Secretariat.
23 109. The Regulatory Board monitors the implementation of all statutory, technical and regulatory rules. The Regulatory Board would be composed of one representative ofthe energy regulators of the Regional Members. The European Commission would represent the European Union. 110. The Secretariat monitors the Energy Community’s development and review the implementation and functioning of the energy market. The Secretariat assists the Council, the Permanent High Level Group, the Forum and the Regulatory Board. 111. Energy Community Market Vision and Sustainability. The current situation and the key dimensions ofthe short- and long-term vision for a sustainable regional electricity market can be briefly outlined as follows. 112. Participants. The main utilities in the region are already engaged in power trading, which provides the basis for further development. The next steps will be bilateral contracts involving unbundled utilities and large customers; followed by expanding trade as electricity markets in each country are further opened and additional customers become eligible and start exercising the freedom to choose their electricity supplier. 113. Market Sophistication. Some of the countries are already developing day-ahead markets (operated by market operators) and real-time balancing mechanisms (operated by system operators). Over time such markets and mechanisms will become increasingly standard; and further sophistication will be developed, including intra-day and real-time balancing markets and financial instruments (possibly starting with a contract exchange). 114. Competition: Current utility-to-utility contracts and other exchanges are typically cooperative and competition is not their key objective. As industry unbundling deepens and in line with market opening across the region, contracting and trading will become increasingly competitive. However, transmission system operators will continue to coordinate on a cooperative basis, as members of SETS0 and in the framework ofthe UCTE. 115. Integration of the Energy Community into the European Union Internal Energy Market: Except for Turkey all countries ofthe SEE operate synchronously as a part ofthe main European power system administered by UCTE Additional transmission links to the EU countries will be developed. They include a second connection between Romania and Hungary (with EBRD financing for implementation), and second connections between Serbia and Hungary and Croatia and Hungary, and a connection between Croatia and Italy/Slovenia (the last three interconnections are candidates for financing under the ECSEE APL). Through integration the countries of the region secure access to major trading partners and important import sources to meet possible electricity shortfalls and requirements for emergency support. This highlights the electricity/economy dimension in the Energy Community’s integration into the European Union internal energy market. 116. The World Bank ECSEE APL Program. The Use of Adaptable Program Lending (APL). The key policy and institutional elements for an APL program have been defined and established. The Energy Community is a regional program, with strong country commitment and with well-established coordination mechanisms at the highest political level, also at the level of regulators and transmission companies in the region, as well as among donors supporting the program, plus the ECSEE Electricity Forum which brings them all together with other stakeholders.
24 117. Bank investment support is being provided using the APL instrument, horizontally on a regional basis (to support up to eight countries and Kosovo) and vertically (each country can in principle be supported from more than one APL installment over the APL program period). An APL enables the Bank to provide regional financial support to a regional program, yet financing would be tailored to the needs of individual countries to help them meet their commitments to the Energy Community. 118. APLl presented the ECSEE program and the first country project in Romania that the Bank would finance. APLl was presented to the Board on January 27, 2005 - the Board approves all first-phase APLs under regular procedures. The approval ofsubsequent APL phases was delegated to the President to be exercised by the Regional Vice Presidents under the oversight ofthe Managing Director. Subsequent country projects would be processed each at its own pace and when ready, each PAD would be submitted for approval by the Vice President, Europe and Central Asia Region. Each PAD would be circulated to the Board for information after Management approves the follow-on operation in principle. Management approval becomes effective 10 working days thereafter, unless at least three Executive Directors request a regular Board discussion during the 1O-day time period. Each country/project could proceed at its own pace and not be held back by the Bank needing to combine several projects for the purpose ofprocessing or approval. 119. APLs typically have 3-5 phases. In the case ofthe ECSEE APL, APLl presented the first country project in Romania together with the APL program. The APL2 phase would cover other country projects approved within FY05, APL3 phase would cover country projects approved in FY06, and APL4-5 phase projects approved in FY07-08 This phasing provides for a four-year program (FY05-FY08). Each APL installment would have an implementation period of up to five years. The implementation ofsome ofthe projects in APL5 could continue until FYO13. 120. APL Triggers. Two sets oftriggers apply under the APL. In addition to project triggers (which determine when an individual investment is eligible to receive Bank funds), policy triggers determine the eligibility of an individual country to receive Bank assistance under the APL program. 121. Policy Triggers. A fundamental eligibility criterion for a country to qualify for Bank support is the signing of the Athens Memorandum - all prospective clients signed the Memorandum on December 8,2003 and thereby they all meet this requirement. 122. Horizontally under the regional APL, a country becomes eligible to borrow once it has met the Energy Community’s basic entry conditions as they were defined in the Athens Memorandum. The ECSEE APL requirements are that an electricity sector regulator and a transmission system operator have been established and are operational. 123. Vertically, a country remains eligible for Bank support under the ECSEE APL program as long as the country has signed and ratified the Energy Community Treaty and meets its key obligations under the Treaty. 124. For a countryhorrower to be or remain eligible for Bank support under the APL program, the Bank also needs to be satisfied that the countryhorrower has the ability to effectively participate in the regional market. With this trigger, the Bank would reserve the right to defer or withhold ECSEE APL support in cases where a country might have complied with the letter of
25 its Treaty commitments but not have implemented or launched credible programs or other critical measures that are needed for market participation. 125. The Treaty calls for the opening of the electricity market to all non-household customers by January 1, 2008. The target dates that are being applied as triggers under the ECSEE APL program will be those incorporated in the Treaty including derogations and subsequent modifications agreed by the EC and Regional Members. Triggers will not be applied to loandcredits already approved. 126. Environmental Considerations. The Bank’s standard environmental requirements would apply to projects supported under the APL program. An environmental management plan or plans acceptable to the Bank would be finalized and disclosed in the country and submitted to the InfoShop prior to project appraisal of category B projects. More comprehensive environmental impacts assessments would be required for category A projects, if any. Most projects to be financed under the program are expected to be category B projects, but some generation renovation projects might receive category A ratings. 127. The US$ 1.0 Billion ECSEE APL Lending Program. The US$1 billion size of the ECSEE APL facility approved by the Bank represents a significant commitment to the Energy Community by the Bank. Even though the size may appear to be large, the financial requirements of power development in the region are also very large, and the Bank’s US$ 1.0 billion has to be seen in this perspective. The SEE region faces a fundamental risk of not being able to meet the growing demand for electricity. Significant capacity additions (of the order of 12,000-15,000 MW) and plant rehabilitations (of the order of 8,000-9,000 MW) will be required during the next ten years, along with matching transmission and distribution system investments if demand is to be met and severe power shortages and supply interruptions are to be avoided. Financing requirements are of the order of some US$30-40 billion and these are conservative estimates. The bulk of such financing, particularly in power generation, cannot be raised in the public sector alone, without significant private sector participation. Through the Energy Community - a regional market ofcountries with harmonized and EU-compatible legislation and institutions underpinned by a legally binding international Treaty - the region will develop an EU-compatible regional market and thereby represent a much larger and more attractive investment destination for prospective investors. 128. The original country breakdown ofthe utilization ofthe APL program financing is given in the table 1.1 below.
26 Table 1.1 : Bank Financing under the ECSEE APL Program (US$ million) APLl APL2 APL3 APL4 APL5
FY05 FY05 FY06 FY07 FY08 TOTAL
Albania 27 30 57
Bosnia and Herzegovina 36 30 66
Bulgaria
Croatia
Kosovo 5 5
FYR of Macedonia 25 25
Romania 84 126 125 335
Serbia 21 50 71
Montenegro 9 9
Turkey 66 150 129 345
Unallocated 30 40 17 87
TOTAL 84 114 255 246 301 1,000
129. The above APL financing plan includes a proposed unallocated portion of US$87 million, in principle available any time when needed in the FY05-08 period), which could be used to find projects in Bulgaria and Croatia (which have not expressed strong interest in the APL facility) andor provide higher volumes to others, or if not needed, would simply not be committed. 130. Albania Country and Sector Issues. Power Sector Infrastructure. The three hydropower plants on the Drin River Cascade (Fierza, Koman and Vau i Dejes) and the two hydropower plants on the Mat River Cascade (Ulza, Shkopeti) account for over 90% of electricity production in Albania. Fierza, constructed from 1971 to 1978 at the top of the Drin Cascade, has active storage of 2,300 million m3, four units with total plant power of 500 MW and annual production of about 1,800 GWh. Koman, constructed from 1980 to 1985 in the middle of the Drin Cascade, has active storage of 200 million m3, four units with total plant power of 600 MW and annual production of about 2,000 GWh. Vau i Dejes, constructed from 1967 to 1971 at the lower end of the Drin Cascade, has active storage of about 250 million m3, five units with total plant power of 250 MW and annual production of about 1,000 GWh. Ulza, constructed from 1952 to 1958 at the high end of the Mat Cascade, has active storage of about
27 240 million m3, four units with total plant power of25 MW and annual production of about 120 GWh. Shkopeti, constructed at the lower end ofthe Mat Cascade fkom 1958 to 1963, has active storage of 40 million m3, two units with total plant power of 25 MW and annual production of about 94 GWh 13 1. The only thermal power plant still operating in Albania is at Fier. The plant operates on heavy fuel oil produced by the Ballsh oil refinery and available capacity is only about 20 MW. The plant is used for only a few days every year due to its low fuel efficiency and therefore elevated costs. The GOA is advancing a concession for its rehabilitation and has selected a preferred bidder in February 2008, but no agreement has been concluded to date. 132. The transmission system consists of 120 km of 400 kV, 1,100 km of 220 kV, 50 km of 150 kV, and 1,200 km of 110 kV lines. There is a 400 kV interconnection to Greece (Elbasan - Kardia), a 220 kV interconnection to Montenegro (Vau i Dejes - Podgorica) and a 220 kV interconnection to Kosovo (Fierze - Prizren). There is also a 150 kV interconnection with Greece (Bistrice 1 - Igumenice). The 220 kV transmission network serves to interconnect the three large hydropower plants on the Drin River Cascade that normally account for over 90% of total electricity generation in Albania (Vau IDejes - 5x50 MW, Koman - 4x150 MW, and Fierza - 4x125 MW) and the thermal power plant ofFier with the major load centers of Tirana-Durres, Elbasan, Burreli and Fier. There are 11 existing transmission substations with a total installed capacity of 2,400 MVA. Two new substations (Durres Rrashbull and Zemblak) have been financed with loans from co-financiers of IDA under the Power Transmission and Distribution Project. 133. The distribution system consists of325 110/35 and 50 110/20kV substations, ofwhich 40 have been recently rehabilitated with donor assistance, including by the Bank, about 25,OOOkm of 35 kv distribution network , 5,000 km of 20 kV distribution network, which is being introduced in large cities to replace the 35 kV, 10 kV and 6 kV networks, 20,000 km of 10 kV network, 10,000 km of6 kV network and 9,000 kV of0.4 network. The 35 kV, 10 kV, 6 kV and 0.4 kV network is mostly old and in need ofreplacement. KESH has had difficulty in providing meters to cover the needs of all consumers, and, in mid-2007, about 70,000 consumers were without meters. The number of consumers increased by about 200,000 from 2003 to 2006 to a total of more than 900,000, largely as a result of large migration to Tirana and other cities and the desire ofsubunits of extended families living in the same dwellings to have their own meters. Since the mid-l990s, KESH, in an attempt to reduce meter tampering and illegal use of electricity, has been purchasing mechanical meters to be kept together in groups of about 16 in locked heavy metal cabinets and installed at the entrance of apartment buildings, and sealed meters with connections to the grid using tamper resistant co-axial cable for detached dwelling units. 134. Power Sector Background At the beginning ofAlbania’s economic transition in the early 1990s, the country was virtually 100% electrified and was a net electricity exporter. However, while the three hydropower plants on the Drin River Cascade, and smaller plants on other rivers, which produced over 90% oftotal electricity supply, were in reasonably good condition, the Fier thermal power plant and the transmission and distribution systems were badly run down because ofprevious neglect ofmaintenance, and there were frequent power outages due to overloading of facilities. Electricity demand within Albania fell initially to 79% of the 1989 level by 1992 because ofdeclines in industrial production. Thereafter it rose by 10.4% per year to 6,160 GWh in 2000. This increase was due mainly to a sustained surge in consumption, much ofwhich was
28 not paid for, by households and small commercial establishments. The quality of electricity supply was improved temporarily by emergency repairs financed by donors, including the International Development Association (IDA). 135. By 1998, Albania had become a net electricity importer. From the second half of 2000, the need for imports increased greatly as a result of a fall in hydropower production caused by reduced rainfall. The country was unable to get all the imported electricity it needed because of transmission and financial constraints. The result was large load shedding, which had serious adverse macroeconomic effects. The fall in hydropower production between 2000 and 2002 had an unavoidable direct and significant adverse impact on national economic output, and the load shedding (which could have been avoided in the absence of financial and transmission constraints) caused cuts in production by industry and obliged other businesses to purchase and use costly back-up diesel generators. Households unable to afford back-up generators had to suffer without electricity for many hours ofeach day. 136. The Albanian Power Corporation (KESH) was unable to pay for more than a small proportion ofthe imports needed out ofits own resources because of financial difficulties caused by widespread illegal use ofelectricity, poor payment ofbills and retail prices which were below the cost of imported electricity. Faced with these difficulties, the Government started providing a subsidy, but its large level (US$31.5 million) in 2001 diverted finds from other critical needs including poverty reduction measures. KESH also began implementation at the start of2001of a rolling multi-year Power Sector Action Plan to tackle the critical issues of the sector, with detailed quarterly and annual targets for key variables such as network losses and bill collection. It managed to reduce total transmission and distribution losses from 44.8% of net transmitted energy (equal to net generation, except from distribution hydropower plants, plus net imports and exchanges) in 2001 to 39.7% in 2004, and improved collections from 76.3% in 2001 to 83.8% in 2004, largely through reductions in receivables from Government budgetary and non-budgetary entities (See the table below). Non-collection from other consumers (about 90% due to households) remained almost constant over this period at just under 20% of the total amount billed. In addition, the Electricity Regulatory Authority (ERE) raised the average tariff from Lek 4.41kWh (excluding VAT) in 2001 to Lek 6.7OkWh in 2004. As a result of these measures, collected revenue increased from Lek 12.50 billion in 2001 to Lek 23.84 billion in 2004. These improvements and greatly improved hydrology after 2002 enabled KESH to achieve satisfactory financial performance and allowed the import subsidy to be phased out by the end of 2004. However, load shedding continued throughout this period. 137. Power sector improvements were partly reversed in 2005 and 2006 because of disruption caused by Parliamentary elections, the coming into power of a new Government and the replacement of KESH’s management and many distribution employees. Total losses rose to 41.9% in 2006, and the collection rate fell to 81.9%, but the tariff was raised to Lek 7.26kWh. Collected revenue reached only Lek 24.86 billion in 2006. A turnaround began in March 2007 with the appointment of a new manager in KESH. The new management has been giving high and widely publicized priority to reducing non-technical losses and improving collections. As a result, total losses fell to 37.1% in 2007, the collection rate increased to 89.5%, and KESH’s collected revenue for 2007 reached Lek 27.25 billion. Nevertheless, the return ofbelow average hydrology in late 2006 and a simultaneous large increase in electricity import prices created severe cash-flow difficulties for KESH in 2007. The Government provided some relief by paying off outstanding arrears on bills to government budgetary and non-budgetary entities and
29 by providing loans. KESH also obtained large overdraft facilities from Albanian commercial banks to help pay for imported electricity. Despite these contributions from the Government and banks, KESH was obliged to increase load shedding to a record-high 927 GWh. ERE approved a tariff increase of about 15% to a level of Lek 8.23kWh in February 2008 (Lek 8.04kWh average for 2008), but KESH has continued to have cash-flow difficulties during the first quarter of2008. 138. The table below shows that demand rose by less than 1 % per year from 2000 to 2006 compared to 10.4% per year from 1992 to 2000. The reduction in rate of growth is probably partly due to the increase in electricity prices, reductions in network losses and improvements in collections. Poor quality supply (voltage variations large enough to damage appliances as well as load shedding) may also have led some consumers to switch permanently to alternative sources ofenergy. However, total current demand, which includes estimated load shedding, may have been underestimated because of the difficulty of measuring the load shedding. If so, the load shedding may be even larger than the amounts shown for the years 2000 to 2007. 139. The expected commissioning ofthe Vlore Thermal Power Plant, financed by EBRD, EIB and the Bank, in 2009 will add about 760 GWyear of domestic production. The completion at about the same time ofa 400 kV transmission interconnection to Podgorica (financed by KfW, to be connected with a new Tirana-Elbasan section financed by COOPI) and a subsequent 400 kV transmission interconnection to Kosovo will relieve the transmission constraint on importing electricity. KESH has no other generating plants under construction. A concession was granted in 1997 for a hydropower plant on the Viosa River, but as ofearly 2008 up to now no significant construction had taken place. Other medium and large power plants have been proposed by private investors, a concession is being planned for the Fier Thermal Power Station, and IFC is assisting the Government to establish a public-private partnership for development of the Ashta Hydropower Plant below Vau iDejes on the Drin River. However, it will be several years before any ofthese options reach the stage of commissioning. As a result, Albania will remain a large net electricity importer for some years. Since hydropower production ranges from below 2,900 GWh in very dry years to as much as 5,800 GWh in abnormally wet years import requirements will continue to be subject to large variations. Because of a worsening electricity shortage in South East Europe import prices have risen to unusually high levels, and KESH has occasionally been unable to contract imports even when it has secured the hnds to pay for them. Bank- financed technical assistance has led to the adoption of expedited procurement procedures for electricity imports but there are still some outstanding procurement issues. The main actions that KESH should implement until new power stations are built and the regional shortage disappears are to strengthen its financial performance so as to improve its ability to pay for enough imported electricity to cover the supply deficit and to finance needed reinforcement and expansion of the transmission and distribution systems to improve quality ofelectricity supply (see table). 140. Power Sector Reform The power sector is undergoing reform. The Law on Regulation of the Electricity Sector, enacted in August 2003, provided for strengthening of ERE, and removed the authority of the Government to fix a price cap. The Transmission System Operator, created from the separation oftransmission from KESH, was registered as a joint-stock company on July 14, 2004 with KESH as the holding company. The Transitional Market Model was approved in August 2004. All non-household customers have been granted the right to become eligible consumers and choose their own suppliers in conformity with the Energy Treaty 2008 deadline. However, all but one customer have chosen to remain as tariff customers in 2008. The
30 strengthening of ERE’S independence and the creation of the Transmission System Operator (TSO) enabled Albania to meet the initial conditions ofmembership in the Energy Community. A second phase ofthe reform process leading to privatization and further implementation ofthe market model commenced with the Government’s decision in 2006 to privatize power distribution. IFC is providing assistance to the Government towards the goal of selling the power distribution company to a strategic investor in 2008. A revised market model, the Albanian Market Model (AMM) has been approved by the Government. The AMM distinguishes between a Wholesale Public Supplier, which would initially be a part of KESH, and a Retail Public Supplier, which is to be privatized with the distribution company. The Wholesale Public Supplier is to be responsible for security of supply to all tariff customers. It will sell its electricity to the Retail Public Supplier at a price regulated by ERE. The distribution company will be responsible for owning and operating the distribution system, and will buy electricity to cover its technical and non-technical distribution losses from the market. Since distribution losses were 1,873 GWh in 2007 the Disco will probably be the main buyer in the unregulated market over the next several years. The financial margins of the Disco and Retail Public Supplier as well as the retail prices for tariff customers are fixed by regulation by ERE. 141. The AMM also stipulates that a power generation company, KESH Gen, is to be separated from KESH and incorporated. Its shares will be held initially by KESH, but the company may be privatized subsequently. KESH Gen will be responsible for the three hydropower plants on the Drin River and the two hydropower plants on the Mat River that would be the beneficiaries of the proposed project. The AMM stipulates that KESH Gen will provide ancillary services to the TSO and offer its remaining electricity to the Wholesale Public Supplier at a regulated tariff. Any electricity not taken by the Wholesale Public Supplier may be sold on the market. Any profits are to be provided to tariff consumers through later adjustments in KESH Gen’s regulated tariff.
31 Figure Al.1. Average Tariffs (excluding VAT of 20%) Figure A1.2. Collection Ratio and Collected Revenues :i 1 'ai2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007 DCOlleCted Revenue (Billion Lek) +Collections (incl. for arrears)(%)
Figure A1.3. Electricity Subsidy Figure A1.4. Collection by Type of Consumers (% ofhilled) Including Arrears
200
6,000 T T 0.8%
100 3,000 0.4% 2,000 0.3% 0.2% 50 1,000 0.1% 0 0 0%. 0 2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007
-Subsidy (mns of leks) of GDP .Households .Other pnvate OBudgetary DNon-Budgetary
Figure AIS. Demand, Production, Net Imports and Load Shedding Figure A1.6. Electricity: Total Loss (% of Domestic Supply)
Cl.a,,i*W. IOU, L- 8,000 - -Net Generation Net IrnpoTts ,c*~nrc,e~"w, 7,000 - 0 Load shedding -Demand 6,000 - 5,000 -
$ 4,000 - '0 3,000 - 2,000 - 1,000 -
2000 2001 2002 2003 2004 2005 2006 2007
Figure A1.7. Transmission and Distribution Losses (in % of electricity) Figure Al.8 Electricity Generation and Growth
Electricity Generation and growth 6o -Non-technical distribution losses -Technical distribution losses 6,000
5 50 4,000
30 2,000 10 1,000 p 0.0 0 2000 2001 2002 2003 2004p2005p 2006 2007
-+Real GDP growth -Generation 2000 2001 2002 2003 2004 2005 2006 2007
Source: Measuring Financial Performancein Infrastructure, ECA, forthcoming
32 v) e3 ? rnx v) I E U s N s 0 am
D
x2 v) +% P
33 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
142. Support for the ECSEE Program. The following is a selective listing ofrelated projects and highlights ofthose that are directly supporting ECSEE’s development. 143. The World Bank has ongoing projects in the electricity sector in most ECSEE countries, and technical assistance in Kosovo. These projects support various aspects of power sector reform and restructuring, including financial aspects, and inter alia help build the foundation for the development of a regional electricity market and participation by the respective countrieshtilities. The Third Power Reconstruction Project in Bosnia and Herzegovina and the Electric Power Emergency Reconstruction Project in Serbia were instrumental for the resynchronization of the second UCTE zone (Eastern part of Bosnia, plus Albania, Bulgaria, Greece, FYR ofMacedonia, Romania, Serbia and Montenegro) with the Western part of Bosnia and Croatia, and the main UCTE Western Europe power system. 144. The European Union supports power sector reform and restructuring under its technical assistance operations in the region. Through its program, in large part co-financed with EIB and EBRD, it is also providing investment support to Transelectrica in Romania. 145. EBRD has ongoing power sector projects in Albania, Bosnia and Herzegovina, Bulgaria, FYR of Macedonia, Romania and Serbia and Montenegro, including private sector power generation in Bulgaria. EBRD has just approved a project that will implement the second interconnection between Hungary and Romania. This interconnector will be one of the means for the integration ofECSEE into the internal market ofthe European Union. 146. KfW has ongoing power projects in Albania, Bosnia and Herzegovina, Kosovo, Serbia and Montenegro. 147. Technical Assistance. Several Bank projects also provide technical assistance. Most noteworthy in this context are the ongoing projects in Romania and Turkey, which support the development of electricity markets. The Spanish Government has provided support through a trust fimd to help the Bank review ECSEE investment projects and to help fund an electricity market expert panel for Turkey. CIDA of Canada is providing regional technical assistance (the SEETEC project) for the development of the regional electricity market in South East Europe. USAID is providing technical assistance on legal and regulatory aspects of power reforms and restructuring, including institution-building support to the regulatory agencies, throughout South East Europe, as well as regional studies on power trade and required communication facilities for the development of ECSEE. Annex 5 ofthe Bank’s March 2004 framework paper (footnote 2) contains a comprehensive listing of technical assistance in the ECSEE context. The Italian Government may provide technical assistance for ECSEE preparatory work to ECSEE Regional Members. All of these agenciedcountries except Spain are members of the ECSEE Forum. In addition, the Pre-accession Programs sponsored by the Government ofNetherlands is providing assistance to the public sectors of the EU candidate member states (Bulgaria, Croatia, Romania and Turkey) for the implementation ofthe acquis communautaire.
34 148. Support for the Albania Electricity Sector. Donor assistance to the power sector began with IDA and Swiss financing of emergency repairs to the power system under the Critical Imports Project in 1992. At that time the power system was badly run down as a result oflack of maintenance and was partly damaged by vandalism. Although the country had a surplus of hydroelectricity there were frequent power cuts due to unscheduled outages in the transmission and distribution systems. Shortly thereafter, non-technical power losses began increasing rapidly. Since then, donor assistance has focused mainly on four areas: supply of meters and technical assistance aimed at reducing non-technical power losses and improving bill collection; rehabilitation of the hydropower stations on the Drin River; rehabilitation and strengthening of the power transmission and distribution systems; and the beginning of sector reforms aimed at improving efficiency, establishing competition and creating conditions conducive to eventual private sector participation in the power sector. 149. With respect to the IDA-financed projects, the Critical Imports Project was rated satisfactory by OED. The Power Loss Reduction Project was rated satisfactory with respect to implementation, but unsatisfactory with respect to achievement of the Development Objective since the numerical power loss reduction targets were not achieved. The same ratings were given for the Power Transmission and Distribution Project. While the original development objectives in terms of loss reduction, bill collection and sector reform were not achieved, the revised targets fixed as a condition for,lifting the project’s suspension were achieved (see Annex 1). The Implementation Completion Report for the Power Sector Rehabilitation and Restructuring Project (for sector reform and rehabilitation oftransmission and distribution) rated the outcome as Moderately Satisfactory. The Power Sector Generation and Restructuring Project (for sector reform and the construction of a new combined-cycle power station at Vlore) is under implementation. The ECSEE APL2-Albania Project for transmission system strengthening is also under implementation and rated Moderately Satisfactory. 150. EIB, Italy, Norway and Switzerland have supported efforts to reduce non-technical power losses and improve revenue collection through the financing of meters and technical assistance. EBRD and later Italy have provided management support to KESH that has focused largely on the same goals. EBRD, Austria, Italy, Japan and Switzerland financed rehabilitation of the hydropower stations on the Drin River through the Drin River Cascade Rehabilitation Project. EBRD, EIB, Italy, Japan and Switzerland co-financed (with IDA) power transmission and distribution system rehabilitation through the Power Transmission and Distribution Project. EBRD and EIB are co-financing the PSGRP with IDA. Germany, Italy and Norway have been providing separate assistance for power sector rehabilitation. Italy has provided financing for imports of electricity. The United States (USAID and USTDA) and Canada (CIDA) have been providing technical assistance for power sector reforms and investment evaluation. A transmission line from Elbasan through Tirana to Podgorica is being implemented with financing by Italy and KfW, and South Korea is providing financing for the Babica 220/110 kV substation and the 220 kV Fier-Babica transmission line. Spain has been providing finance for power distribution .
35 Annex 3: Results Framework and Monitoring ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
PDO Outcome Indicators Use of Outcome Information
ECSEE APL. The ECSEE APL Electricity markets in An increasing number of establishes the ECSEE APL South-East Europe are electricity consumers are free facility for the implementation of liberalized in accordance to choose their electricity priority investments in electricity with the ECSEE Treaty supplier , generation, transmission and (including derogations and distribution and technical subsequent modifications, assistance for if any) and a regional institutionalhystems development electricity market is and project preparation and functioning. implementation for the development ofa functioning regional electricity market in South East Europe and its integration into the internal electricity market ofthe EU.
ECSEE APLS-Albania Dam (i)Total safeguarded dams and generation capacity. (i)See (a), (b) and (c) in the Safety. The development Intermediate Outcomes objectives ofthe project are to: (i) (ii)Electricity output due to section.($ Verification ofthe contribute to safeguarding the reduced water leakages and magnitude ofoutput increases. hydroelectric dams ofAlbania; electro-mechanical (iii)Verification ofwhether the and (ii)improve their operational equipment rehabilitation. techniques work as expected to efficiency and enhance the increase hydropower stability ofpower supply for the (iii)Electricity output due production from the existing regional market. to improved reservoir system. (iv) Load frequency optimization procedures; control is a necessary condition for joining UCTE. (iv) System load frequency variations.
Intermediate Results Results Indicators for Use of Results Monitoring Each Sub-component
36 Component 1: Physical infrastructure investments
Completion of safeguarding and (a) The rehabilitated safety monitoring measures of spillways are tested and (a) The results ofthe spillway very high priority. hctional; rehabilitation will help (b) The emergency determine whether additional preparedness plan is ready rehabilitation or enhancement and staff trained in is needed; (b) the emergency implementation; preparedness plan will enable (c) The monitoring and fast and appropriate handling alarm systems are installed ofemergencies; (c) The and operators have the information obtained from dam capacity to use them. monitoring and alarm systems will enable actions to be taken to avoid dam failures and minimize the adverse consequences ofsuch failures.
Remedial measures of high Completion of (i) Fierza (i)and (iii)Same as (a) above. 2riority Dam - rehabilitation of (ii)Same as (c) above. (iv) spillway no. 3; (ii)Fierza Confirmation that the and Koman geological equipment continues to be monitoring system; (iii) available in good working Vau i Dejes - spillway order. rehabilitation; (iv) KESH Dam Safety Department equipment,
Completion of(i) Koman - iemedia, measures ofmec rehabilitation of spillway iriority and operational (i)Same as (a) above. (ii) gate seals, as well as mprovements Determination ofpossible fiames, cylinders and hrther rehabilitation, spare hydraulic power units; (ii) parts and maintenance Koman -rehabilitation of requirements. electromechanical equipment,
Frequency control Completion offrequency control system at Vau i Determination ofwhether Dejes and Fierza. further measures are needed.
37 Component 2: Technical assistance and training (i)Completion ofthe study. Verification ofwhether the Hydrology analysis and water (ii)Implementation ofthe technical assistance results are management recommendations. effectively used.
Emergency preparedness plan (i)Completion ofthe plan. The plan meets a Safety of (ii)Adoption. Dams policy requirement (OPBP 4.37)
Strengthen the capacities of Verification ofwhether the KESH’s dam safety department Completion ofthe activity. organizations perform and AlbCOLD adequately.
(i)Completion ofthe study. Verification ofthe extent to Assist in defining a structure, (ii)Implementation of which the recommendations are organization and ownership for recommendations. implemented. KESH Generation
Studies for new hydropower Completion ofthe studies. The information obtained from development the hydropower studies would make it easier to award viable new hydropower concessions by reducing preparation costs and risks to potential bidders.
Establishment ofa financial The system would provide Financial management capacity management system that KESH’s owner (the building would enable KESH to (i) Government) and possible get satisfactory independent future private investors in the audits in accordance with power sector with more reliable international standards; and information on KESH’s (ii)meet ERE’Sdata finances. requirements.
Establishment ofthe panel Verification ofthe panel (i) Safety ofdams experts panel with fill staffing providing effective advice; and (ii)KESH implementing its recommendations.
38 3 2 3 z c E
.-E .-8 c 0N n n c fi s .e 7 c W W w W P P
* s $ $ g m 0 c 0 0 N E: 0m m
Y ji z $ s 8& * 0 0 0 2 v t; ‘R
s g 0 0 0 N
* g g Y 0 0 N 5 3 3 5 3 3 3 3 E 6 6 E z z E E,
0 d 0 0 3 I .-I .-I 8 .--I n n 5 n Annex 4: Detailed Project Description ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
15 1. Maintenance and repairs in the country’s dams need to be carried out urgently. There is considerable uncertainty about whether the current condition and operation practices ofthe dams will withstand an extreme weather event that might occur -it is possible that climate change will increase such risks. The GOAhas recognized the need to address safety issues ofits hydroelectric facilities and requested the Bank’s assistance to improve the sector. 152. The 2006 Dam Safety Survey recommended a series of investments to improve dam safety and operation and categorized them into: (i)very high priority, high priority and medium priority (Euro 28m); and (ii)conditional high priority (Euro 153m) measures. The project would finance the very high priority, high priority and medium priority investments, which are the most precisely defined and need relatively little further study. 153. These investments include works to rehabilitate and ensure the proper hctioning of spillways, installation of safety alarm systems for flood warning and geodetic monitoring, rehabilitation of electromechanical equipment, instrumentation and monitoring equipment. Additional civil works and investments for some medium and high priority measures may be needed to complete the dam safety measures and will be studied further during project implementation. EBRD has agreed to provide financing for any additional safety investments as they are being precisely defined with a project of up to Euro 30m. The need and alternative approaches for the higher cost category (ii),conditional priority, investments will be assessed during project implementation. 154. The project would consist of two main components: (1) physical infrastructure investments; and (2) technical assistance (see also Dam Safety Survey and Inception Reports for a detailed description). 155. Component 1: Physical Infrastructure Investments (a) Remedial Measures of Very High Priority (Euro 3 million): (i) Dam Safety Alarm Systems for Drin and Mat River Basins include the specification and implementation of water alarm systems in the Drin and Mat River basins (Euro 2 million); (ii) Dam Monitoring Systems for Drin and Mat River Basins include the specification and implementation of dam monitoring equipment including GPS, and implementation ofa data acquisition system (Euro 1 million). (b) Remedial Measures of High Priority (Euro 4.8 million): (i)Fierze Dam - Rehabilitation of spillway no. 3 (Euro 2.8 million). Spillway no. 3 may not be able to close after its opening. The intake tower has to be modified and a temporary gate constructed in front of the maintenance gate to permit independent closure ofthe spillway no. 3. Lifting cables ofthe spillway gates need to be replaced by galvanized or steel ones. Proper electrical wiring and connections upgrade for the hoists are required. Lighting and a safe gangway to the gate of spillway no. 3 have to be provided; (ii) Fierza and Koman Geological Monitoring System- includes the specijkation and implementation of movement/landslide alarm systems linked to GPS for identiJed potential geological slip zones (Euro 1.6 million); (iii) Vau i Dejes - Spillway rehabilitation. All spillway cables should be replaced by galvanized or stainless steel ones and a stop-log system needs to be
41 implemented (Euro 0.3 million); (iv) KESH Dam Safety Department- equipment for data archives, monitoring and documentation. (Euro 0.1 million).
(c) Remedial Measures of Medium Priority and Operational Improvements (Euro 7 million): (i) Koman Dam - General rehabilitation of spillway gate seals, as well as frames, cylinders and hydraulic power units. (Euro 0.5 million); (ii) Koman Dam - rehabilitation of electromechanical equipment (Euro 5 million); (iii) Vau i Dejes and Fierza Dams - Implementation of Load Frequency Control systems to allow for the integration of Albania’s electricity system with UCTE (Euro 1.5 million). 156. Component 2: Technical Assistance and Training (a) Hvdrolom Analvsis and Water Management (Eurol.5 million). Focusing on KESH and the Drin and Mat river basins the project will provide technical assistance to develop and train KESH on an integrated water resources management approach for the management ofthe Matt and Drin river basins and the optimization of power dispatching and water resource management. Dam safety, water infrastructure, and hydropower are essentially about water management. However, because of the lack of maintenance and institutional weakening in Albania, afler the country’s transition, the knowledge and practices on water management have been neglected and significant gaps were created. The project therefore to achieve its objectives will also provide technical assistance to: (i)improve the quality and availability of hydrological data, analysis and modeling; (ii)study the possibility of changes to operating rules to provide increased economic, environmental and social benefits, and (iii)incorporate implications of climate change in terms ofhydrological profiles. Some ofthis analytical work has started during project preparation and will continue during project implementation.
The project team has been coordinating with bilateral aid agencies (SECO and SIDA) on projects aiming to enhance the country’s ability on water management. The World Bank’s Disaster Management and Risk Mitigation project for the SEE is also providing assistance for better weather and hydrological monitoring at the country level.
f’b) Project Implementation Consultants (Euro 2.5 million). The project will require specialized consultants during its implementation to assist KESH with to assist with procurement, design, and supervision ofvarious contracts.
(c) Institutional Strengthening (Euro 0.4 million). The development of a Safety ofDams culture within KESH and the institutional strengthening of the Albanian Commission of Large Dams (AlbCOLD) is a requirement for the sustainability and long-term implementation of safety measures. Technical assistance will be provided to prepare an emergency preparedness plan and, to strengthen the capacities ofKESH’s dam safety department and AlbCOLD.
(d) Studies for Further Hydropower Development (Euro 2 million). Albania has considerable undeveloped hydropower potential that when developed would provide additional capacity to the country and the regional electricity system. Around the Drin River area there seems to be potential for further development, or pumped-storage options. To address the initial upstream costs of feasibility studies this technical assistance component will finance detailed feasibility studies for new hydropower development in Albania. This technical assistance will also investigate options for KESH Gen’s future structure and ownership, and assist KESH Gen to
42 design a new organization structure, prepare a human resources plan and business procedures, and assist in other activities related to establishment of a separate company that will operate in accordance with the Albanian Market Model.
(e) Financial Management Cavacity Building for KESH (Euro 0.5 million). KESH, in compliance with the Energy Community Treaty is undergoing further unbundling. The Transmission System Operator (TSO) became a separate entity in 2006, while a DSO was instituted legally in 2007. The TSO is currently fully owned by KESH, while the DSO is in the process ofprivatization (expected by end of2008). These changes have created a need for better financial reporting under International Financial Reporting Standards (IFRS) to improve sector monitoring and regulation. However, there is limited capacity in KESH to monitor its financial transactions and prepare adequate financial statements. This component will address these shortcomings. It will include establishing a new financial management system in KESH Gen and contribute to the allocation of assets and liabilities and creation ofan opening balance sheet.
@ Sufetv of Dams experts vanel (Euro 0.2 million). An independent panel ofexperts is required to oversee the design and implementation of various interventions in the project dams as per Safety of Dams safeguards policy. This component will finance the work of the independent experts.
43 Annex 5: Project Costs ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
Project Cost by Component Local Foreign Total Euro m Euro m Euro m
Dam Safety Alarm Systems for Drin and Mat River Basins 0.30 I 1.70 I 2.00 I Dams Monitoring Systems.for Drin and Mat River Basins I 0.15 I 0.85 I 1.00 I Fierza Dam - Rehabilitation of spillway no. 3 0.45 2-55 3.00 Fierza and Koman Geological Monitoring System 0.24 1.36 1.60 Vau i Dejes - Spillway rehabilitations and maintenance stoplogs 0.27 1.53 1.80 KESH Dam Safety Department Information Technology and Archiving 0.02 0.09 0.10 Koman Dam - Rehabilitation of spillway no. 3 0.30 1.70 2.00 I Koman Dam - Rehabilitation of spillway no. 4 I 0.15 I 0.85 I 1.00 I Koman Dam - rehabilitation of electromechanical and safety equipment 0.95 5.36 6.30 Vau i Dejes and Fierza Dams - Implementation of Load Frequency 0.23 1.28 1SO Control
Hydrology Analysis and Water Management 0.23 I 1.28 I 1SO I Project Implementation Consultants I 0.38 1 2.13 1 2.50 I Institutional Strengthening for Dam Safety and Emergency Preparedness 0.06 0.34 0.40 Studiesfor new hydropower development 0.30 1.70 2.00 Financial Management capacity building 0.08 0.43 0.50 Safety of Dams experts panel 0.03 0*17 0.20
Total Baseline Cost 4.11 23.29 27.40 Physical Contingency [ 15%] 0.62 3.49 4.11 Price Contingency [ 15%] 0.62 3*49 4.1 1 Unallocated 0.15 1.00 Total Project Cost 5.49 31.13 36.62
Total World Bank Financing (equivalent US$35.3 million) 21-80 21.80 I SECO Parallel Financing I I 4-60 I 4.60 1 EBRD Parallel Financing 4.77 4.77 KESH Financing 5.49 5.49
Notes:
44 (1) Assumed exchange rate: Euro 1 = US$l, 62.
(2) The scope ofthe Bank financing includes supply of equipment and materials with supervision of installation.
(3) The final cost estimates for some infrastructure investments will be determined after a detailed feasibility study and procurement is completed during project implementation. Those investments will be financed under a separate project by EBRD.
45 Annex 6: Implementation Arrangements
ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
157. ECSEE APL Program A comprehensive coordination and implementation mechanism has been established for the development ofECSEE. The mechanism covers and brings together political and administrative leadership, regulators, transmission system operators and other utilities, the European Commission, international financial institutions and bilateral donors in ECSEE’s Ministerial Council, Permanent High-level Group, Task Forces, and the Forum. This mechanism is detailed in Annex 1, Section 1. 158. ECSEE APL5-Dam Safety Project Albania’s power sector institutional strengthening and reform measures are based on: (i)a rolling multi-year Power Sector Action Plan focusing on measures to strengthen KESH’s performance, which was first adopted by the Government and KESH in January 2001, with full support from the donor community, and updated in each subsequent year; (ii)the Law on Regulation of the Electricity Sector enacted in August 2003, which has served as the basis for strengthening ERE; (iii)the Energy Strategy adopted by the Government in June 2003, with a draft updated Strategy completed in mid-2007; (iv) the Albania Market Model approved by the Government in March 2007 and amended in preparation for privatization of the distribution company in . . .2008; and (v) Albania’s commitments under the Energy Treaty (2005), which envisages sector restructuring based on the provisions of the EC Directives 2003/54/EC. Details ofthe reforms undertaken and recent performance ofthe power sector are given in Annex 1, Section 3.
159. Ofthe total project cost of US$ 56.8 million equivalent the IDA credit would finance of US$ 35.3 million equivalent. Co-financing of US$ 5 million equivalent would be provided by KESH. Parallel financing of up to US$ 41 equivalent would be provided by SECO and the EBRD for some components to be defined later.
160. The IDA credit would be lent to Albania for 20 years with a 10-year grace period and at the standard IDA service charge. The credit would be re-lent to KESH on the same terms since dam safety is critically important for Albania quite apart from its importance for power generation. KESH would re-lend the credit to KESH Gen.
161. The proposed project would be implemented between September 2008 and September 2013, with a closing date of December 31, 2013. Management of the implementation of the project would be carried out by KESH, with the Project Management Unit (PMU) responsible for implementation of the Power Sector Generation and Restructuring Project and the ECSEE
, APL2-Albania project continuing for the proposed project. Implementation Consultants under the project would help the PMU prepare the bidding documents and monitor implementation with the Bank’s policies for procurement ofgoods and services and selection ofconsultants. 162. The specific Credit covenants applicable to the ECSEE APL5-Dam Safety Project would be as follows. 163. Effectiveness Condition Execution of the Subsidiary Loan Agreement between the Borrower and KESH.
46 164. Additional Remedy Condition
0 IDA would have the right to resort to its remedies if parallel financing by EBRD and SECO are not approved and available by December 3 1,2009.
Implementation Covenants
65. The Borrower has agreed to:
0 On-lend the funds to KESH for 20 years with a 10-year grace period and at the standard IDA service charge.
66. KESH has agreed to:
0 Not later than September 30, 2009, prepare and adopt an Emergency Preparedness Plan, in a manner satisfactory to the Association. 0 Not later than September 30, 2008, appoint, and thereafter maintain, a Panel of Experts with terms ofreference acceptable to the Association. 0 Prior to the commencement of procurement activities under Part 1.4 of the Project, prepare a Resettlement Action Plan and update the Environmental Management Plan, if required in the opinion of the Association, and in a manner satisfactory to the Association. 0 Adopt the Dam Safety Institutional Plan by December 3 1, 2008 and thereafter implement the Dam Safety Institutional Plan in a manner acceptable to the Bank. 0 Carry out procurement in accordance with the provisions of Schedule 1 to the Project Agreement, as said provisions my be Wher elaborated in the Procurement Plan; 0 Update the Procurement Plan in accordance with guidelines acceptable to the Association, and furnish such update to the Association not later than 12 months after the date ofthe preceding Procurement Plan, for the Association’s approval; 0 Maintain a self-financing ratio ofat least 0.35 in 2008 and onwards; 0 Not incur new debt unless KESH’s total debt service is covered at least 1.5 times by net internal cash generation; 0 By October 15 of each year, commencing in 2008, on the basis of forecasts prepared by KESH, review whether it would meet the self-financing requirements for the following year, and furnish the results ofthis review to the Association; 0 By October 15 ofeach year, commencing in 2008, review its program ofproposed capital expenditures for the following five years, and finalize said program, acceptable to the Association; 0 Maintain an acceptable financial management system with accounting standards according to International Accounting Standards (IAS) and International Financial Reporting Standards (FRS) as promulgated by the International Accounting Standards Board (IASB) for the purposes of the financial statements required to reflect its operations and financial conditions, and to register separately the operations, resources and expenditures related to the project; 0 By March of each year, appoint an independent auditor acceptable to the Association to audit the project accounts and financial statements of the company for the same fiscal
47 year and submit, within six months after the close of each fiscal year, these audited accounts and statements. In addition, the audits will be conducted in accordance with International Standards on Auditing (ISA) as issued by the International Federation of Accountants (IFAC) and on terms ofreference acceptable to the Association.
0 Implement the Environmental Management Plan in a timely manner;
0 Establish an Emergency Preparedness Plan by September 30,2009;
0 By December 31, 2011, furnish to the Association a monitoring and evaluation report, and by January 15,2012 review this report with the Association; and
0 Prepare a plan for the future operation ofthe project not later than six months before the closing date ofthe project.
167. ' A procurement plan has been prepared (see Annex 8).
48 Annex 7: Financial Management and Disbursement Arrangements ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
Conditions of Risk FM Risk Mitigating Measures Residual Negotiations, Risk Risk INHERENT RISKS
Country level. High corruption risk, H KESH is to maintain independent FM system, use S No though public financial management are of private auditors and use of Central Bank for improving. Weak institutions (additional designated account. information are included in country issues) Entiiy Level. Risk of political S Any changes to the structure and key staffing in M No interference in entity’s management. the implementing agency will require agreement with the Bank Project Level. Project is medium sized, S Adequate control mechanism for payments have M No one implementing agency and is not been agreed and included in the project complex operational manual, the flow of funds arrangement has been agreed with the Central Bank; and PMU’s experienced FM staff will be involved in making operational the agreed funds
49 Conditions of Risk Risk Mitigating Measures Residual Negotiations, Risk Risk flow diagram; OVERALL INHERENT RISK
CONTROL RISKS
Additional procedures are included in the FM No chauter. MI An appropriate project financial management Excel based financial management, software system would be shortly developed. In accounting and reporting system is used addition, the staff has extensive experience in the by the PMU. Bank’s procedures for disbursement and FM, including IFR preparation. Internal Controls. Internal controls of Additional procedures are included in the FM M No KESH are acceptable. chapter of the operational manual and independent auditors to monitor the project implementation and results verification. A designated account would be opened in the L No Bank of Albania.No significant issues identified during implementation of other projects via Bank of Albania. A project financial management software system M No integrated accounting and auditing would be installed shortly and will enable the system. PMU to generate the required reports automatically. PMU described the control procedures in the FMM and enforces them to ensure that the IFRs are submitted to the Bank on time with consistent quality control procedure over financial reporting. Auditing. KESH has selected the auditor for FY 2007 with 1the reports to be submitted by due date. KESH will ensure that future audit selection is commenced well in advance. The audits are carried out by independent auditors acceptable to the Bank. zOVERALL CONTROL RISK RESIDUAL RISK RA TING Is
172. Strengths. The significant strengths that provide a basis of reliance on the project financial management system include: (i)the experience of the PMU and its finance staff in implementing IDA-financed projects and satisfying Bank financial management requirements; and (ii)the unqualified audit reports and positive management letters issued by the PMU’s project auditors, although a number ofissues are continuing in the audits ofthe entity. 173. Weaknesses and Action Plan. There are no major weaknesses identified in KESH. 174. Implementing Entity. The PMU was created within KESH specifically to implement IDA-financed projects and has established a successful track record in its implementation of these projects. It implemented the IDA-financed Power Transmission and Distribution Project and Power Sector Rehabilitation and Restructuring and is implementing the Power Sector Generation and Restructuring Project and the ECSEE APL 2 project. Before that, KESH also implemented the power component ofthe Critical Imports Project and the Power Loss Reduction Project. All financial management activities will be carried out by the PMU. 175. Budgeting. The project team, including finance unit and procurement, has good budgeting capacity and this is also supported by a separate chapter in the Financial Management Manual (FMM) where there is a comprehensive description of the budget process, including the co-ordination of the process, budget implementation plan and budget revision mechanism. The
50 procurement plan prepared by the procurement specialist and approved by the Project Director forms the basis for allocating hnds to project activities, for the preparation of quarterly and annual budgets and for requesting finds from KESH for counterpart finding. The Action plan is approved by the Board ofDirectors of KESH and by the World Bank. The risk associated with budgeting is assessed as moderate. 176. Accounting. Staflng. The FMS and disbursement staff of the PMU are knowledgeable of WB procedures and well trained to carry out their responsibilities. These two people are also in charge of implementing the other WB project and based on our assessment this number adequately covers the accounting and reporting needs. The PMU’s director will perform the authorization and the control of payments after these has been cleared by the Finance staff. In addition, he will work closely with the Finance unit to ensure that quarterly interim un-audited financial reports (previously called Financial Monitoring Reports, FMRs), annual financial statements and other progress reports are submitted timely to the Bank reflecting the implementation status ofthe project. The risk associated with staffing is assessed as moderate. 177. Information systems. The PMU will initially use an Excel based financial management, accounting and reporting system, with adequate password protection and restricted access. Specific ledgers will allow the project unit to record distinctly the operations ofthe new project using the existing chart ofaccounts. The risk associated with information systems is assessed as substantial. In order or hrther strengthen the financial management arrangements, an appropriate project financial management software system would be developed by July 3 1, 2008. 178. Accounting Policies and Procedures. The accounting books and records will be maintained on a cash basis and project financial statements will be presented in United States Dollars. The project will follow the PMU’s policies and procedures for the processing of payments. The chart of accounts currently used is adequate and could be adapted for the purposed of new project. The risk associated with accounting policies and procedures is considered as moderate. 179. Internal controls and Internal Auditing. PMU has adequate internal control procedures which are documented in the FMM. The project will utilize existing internal controls within KESH and supplement these with additional controls to ensure that fimds are used effectively and efficiently for the purposes intended. The internal controls include (i)procurement controls - World Bank procurement procedures will apply, (ii)accounting controls - additional appropriate controls will be implemented, (iii)quality controls - on site supervisors will verify all bills before payments are made, (iv) management controls - project coordinator will be appointed to coordinate and provide general oversight, (v) audit controls - an independent acceptable audit firm acceptable to IDA will audit annually the project and KESH’s financial statements, based on audit terms of reference acceptable to IDA; and (vi) supervision controls - the World Bank team will regularly carry out supervision ofthe project. The FM Manual reflects also the internal structure relevant to the project, administrative arrangements, internal control procedures, including procedures for authorization of expenditures, maintenance of records, safeguard of assets, segregation of duties to avoid conflict of interest, monthly reconciliation of Bank statements with the project records, monthly reconciliation of disbursement summaries of the World Bank with project records, bank signing mandate (to include at least two signatories), regular reporting to ensure close monitoring ofproject activities.
51 180. The main internal controls would involve contract approval mechanisms and invoice verification procedures. The director of the PMU will authorize the payments only upon obtaining appropriate evidence form the beneficiary that the goods delivered, works completed and services rendered adhere to the technical specifications. 181. As the capacity of the internal audit is generally still low no specific reliance on the internal audit is planned for this project. The risk associated with internal controls and internal audit after risk mitigating measures is considered as moderate. 182. Financial Reporting. PMT will produce all financial reports for the Bank with the existing excel system until the new accounting software will be installed. The Un-audited Interim Financial Reports (IFRs) will be used for project monitoring and supervision and the indicative formats ofthese will be included in the PMU operational manual. The project will prepare a full set of IFRs every three months throughout the life of the project and submit these to the Bank within 45 days after the end ofeach calendar quarter. Draft formats ofthese IFRs will be agreed during the negotiations. The IFRs include the following tables: (a) Project Sources and Uses of Funds; (c) Components as per cost categories; (d) Designated account reconciliation statement; and (e) Contract Expenditure reports for technical services, civil works and goods. The risk associated with financial reporting is moderate. 183. External Auditing. As ofthe date of this report, the KESH does not have any overdue audit. The project’s and the KESH’s financial statements will be audited by independent auditors and on terms ofreference acceptable to the Bank commencing with the accounts for the year ending December 3 1, 2009. The following chart identifies the audit reports that will be required to be submitted by the project implementation agencies together with the due date for submission.
Audit Report Due Date Entity financial statements Within six months of the end of each fiscal year and also at the closing ofthe project Project financial statements (PFS) for the project, Within six months of the end of each fiscal year including SOEs and designated accounts. The PFS and also at the closing of the project include sources and uses of funds by category, by components and by financing source; SOEs, Statement of designated account, notes to financial statements, and reconciliation statement.
184. The audit reports for the project financial statements and the management letter for the two projects that KESH implements ( PSGR & ECSEE) were received on July 2 , 2007. KESH delayed the submission ofthe audit report on the entity financial statements due to delays in the appointment ofthe consultant who was responsible for assisting KESH in the preparation ofthe entity financial statements in accordance with the International Financial Reporting Standards (IFRS). The entity audit report was submitted on November 13,2007. 185. The project audit reports were unqualified. The entity audit report was a qualified disclaimer; some of the qualifications were also Management Letter points. In order to address the issues in the qualifications and the recommendations in the management letter, KESH agreed on a detailed action plan and is in the process of implementing it. Some of the qualifications were relating to the inability of KESH in fully complying with IFRS and the current Albanian Accounting legislation. Therefore, the contract with IFRS consultant was extended further in
52 order to continue to provide assistance to KESH Finance Unit in the way of implementing the necessary measures for compliance with IFRS . The World Bank would also follow-up on the progress in this area, which will be closely monitored during the regular financial management supervisions. 186. Furthermore, KESH is a public interest company and, effective from 2008, is subject to the new Law no. 9229 dated 29 April 2004 “On accounting and financial statements”, which requires the companies ofpublic interest to prepare their financial statements in accordance with IFRS. Therefore, this new project provides funds to further strengthen KESH’s financial management capacity on aligning with this new statutory requirement. The terms ofreference for the project and entity audits will be provided to KESH as part ofthe minutes ofnegotiation. The annual cost of the audits will be covered by KESH. The risk associated with external audit after risk mitigating measures is considered as substantial. 187. Flow of Funds and Disbursement Arrangements. The project funds will flow from the IDA via one foreign currency-denominated designated account (previously called special accounts) in Bank of Albania (BOA) from which the funds will be transferred to a commercial bank account. Counterpart hnds are transferred through KESH directly to the suppliers. Project funds will flow from: (i)the Bank, either via a single Designated Account which will be replenished on the basis of SOEs or by direct payment on the basis ofdirect payment withdrawal applications; or (ii)KESH, via the transfers to the commercial banks on the basis of payment requests approved by the Economic Department ofKESH directly to the local supplier for VAT and other taxes. The ceiling for the IDA Designated Account would be Euro 300,000. Applications for replenishment of the Designated Accounts will be submitted quarterly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow standard Bank procedures as described in the Disbursement Handbook. The risk associated with funds flow and disbursement is considered as moderate. 188. Supervision Plan. During project implementation, the Bank will allocate up to 3 staff weeks for the financial management supervision. The Bank supervise the project’s financial management arrangements in the following ways: (i)review the project’s quarterly interim un- audited financial reports as well as the project’s annual audited financial statements and auditors’ management letter, (ii)during the Bank’s supervision missions, review the project’s financial management and disbursement arrangements (including interim reports (IFR) and movements on the Designated Account) to ensure compliance with the Bank‘s minimum requirements, (iii) Monitor the progress in implementing the action plan in addressing the qualifications in the auditors’ report and management letter. As required, a Bank-accredited Financial Management Specialist will assist in the supervision process.
53 Annex 8: Procurement Arrangements ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
A. General
189. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 as revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 as revised October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
190. Procurement of Works: Works procured under this project would include one package with four lots as follows. Bidders prequalification procedures will be followed for this package:
0 Rehabilitation ofa Fierza Dam Spillway;
0 Rehabilitation and Stoplogs Installation ofVau iDejes Spillway; Rehabilitation ofKoman Dam Spillway N. 3 and
0 Rehabilitation ofKoman Dam Spillway No. 4
191. Procurement of Goods: Goods procured under this project would include: 0 Supply and Installation of Koman Hydropower Plant - Electromechanical and Safety Equipment Rehabilitation; 0 Supply and Installation of Vau i Dejes and Fierza Dams - Implementation of Load Frequency Control; and 0 Procurement ofIT and Archiving Equipment for KESH Dam Safety Department through Shopping
192. The following packages are expected to be financed by SECO in accordance with SECO's procurement and consultant guidelines:
0 Alarm Systems for Drin and Mat River Basins;
0 Dam Monitoring Systems for Drin and Mat River Basins; and
0 Fierza and Koman Geological Monitoring System
193. The procurement of IDA-financed components will be done using the Bank's SBD for ICB and Shopping and will be subject to prior review. The procurement of donor-financed components will be done using the relevant donor's method. All Procurement, including Shopping will be subject to prior review. Relevant Standard Bidding Documents of the Bank will be used.
54 194. Selection of Consultants: The Consultant Services under this project would include: (i) Hydrology Analysis and Water Management; (ii)Project Implementation Consultants; (iii) Institutional Strengthening on Dam Safety and Emergency Preparedness; (iv) Studies for New Hydropower Development; (v) Financial Management Capacity Building; and (vi) Dam Safety Review Panel.
195. The procurement procedures and Standard Bidding Documents to be used for each procurement method, as well as model contracts for works and goods procured will be presented in the Implementation Manual. The applicable selection methods will be as follows: Quality and Cost Based Selection (QCBS) method will be a preferred method for a majority of consulting assignments depending on the size and complexity ofthe assignment. Quality Based Selection (QBS) method will be used for specialized assignment, where cost considerations are of less importance and costs are also not expected to differ substantially between the consulting firms. Consultants Qualzjkations (CQ) will be used for contracts estimated to cost less than US$200,000 equivalent, such as specialized review, study, etc. CQ shall be used in cases when the above methods do not apply. Single Source Selection (SS) may be used in exceptional cases as per provisions of the Guidelines and with prior Bank approval. Contracts with individual consultants (IC) may be used for services where teams of personnel are not required and where the qualification and experience of the individual consultant are the paramount requirements.
196. The procurement procedures and Standard Bidding Documents to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project Implementation Manual.
B. Assessment of the agency’s capacity to implement procurement
197. Procurement activities will be carried out by KESH. The PMU is staffed by a Director, a Procurement Specialist, a Contract Administrator, Financial Specialist and a Project Coordinator. Project and corporate procurement staff from KESH have attended Bank related procurement training in Sarajevo in December, 2007. The PMU staff has displayed increased knowledge and skill in international procurement because of their previous involvement in Bank projects (Power Sector Rehabilitation and Restructuring Project, Power Sector Generation and Rehabilitation Project, ECSEE APL 2) and their involvement in other donor financed projects.
198. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Angelica Fernandes, Procurement Analyst, on April 28-30,2008.
199. The key issues and risks concerning procurement for implementation of the project have been identified and include (i)the abnormal procurement delays in ECSEE APL 2 project; (ii) delays in the evaluation ofbids due to disagreements with the international consultants advising KESH on procurement; and (iii)weak institutional capacity to monitor dam policies and coordinate dam safety issues. The corrective measures which have been agreed are: (i)KESH
55 will be responsible for managing the Project. For this purpose, it will use its existing capacity and experience acquired under previous projects; (ii)to increase KESH’s technical and implementation capacity, the PMU will employ a consulting firm with experience in project management, procurement, including preparation of technical specifications. KESH will select such a firm before starting procurement procedures for project components.
C. Procurement Plan
200. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on May 21, 2008 and is available at Sustainable Energy Development (ECSSD), Europe and Central Asia Region. It will also be available in the project’s database and in the Bank’s external websites. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
D. Frequency of Procurement Supervision
201. In addition to the prior review supervision to be carried out by the Bank offices, the capacity assessment of the Implementing Agency has recommended at least two supervision missions a year to visit the field to review the status ofthe procurement actions.
E. Details of the Procurement Arrangements Involving International Competition
Ref. Contract Estimated Procurement P-Q Domestic Review Expected Comment No. (Description) cost Method Preference by Bank Bid-Opening (in EUR ml) (yedno) (Prior / Post) Date Alarm Systems for June 2009 1.1 Drin&MatRiver 2.0 ICB No Y Prior Basins Dam Monitoring June 2009 1.2 Systems for Drin and Mat River 1.o ICB No Y Prior Basins Fierza and June 2009 1.3 Koman Geological 1.6 ICB No N Prior Monitoring System Lot 1: Fierza Dam Oct 2009 1.4.1 - Rehabilitation of 3.0 ICB Y N Prior Spillway 1.4.2 Lot 2: Vau i Dejes Oct 2009 Spillway 1.8 ICB Y N Prior Rehabilitation and Stoplogs Install. 1.4.3 Lot 3: Koman Dam Oct 2009 - Rehab of 2.0 ICB Y N Prior Spillway 3 1.4.4 Lot 4: Koman Dam Oct 2009 - Rehab of 1.o ICB Y N Prior Spillway 4 1.9 Koman Oct 2009 Hydropower Plant- 6.3 ICB Y N Prior Electromechanical and Safety Equip rehabilitation
56 1.10 Vau i Dejes and February Fierza 1.5 ICB No N Prior 2009 Implementation of Load Frequency Control 1.4. KESH Dam Safety Nov 2008 Dept. - IT and 0.1 SH No N Prior
** Contracts 1.1, 1.2 and 1.3 are expected to be financed by SECO.
Contract Estimated Procurement P-Q Domestic Review Expected (Description) Method Preference by Bank Bid-Opening in EUR ml (yesino) (Prior / Post) Date Alarm Systems for June 2009 ICB No Y Prior Basins Dam Monitoring June 2009 1.2 Systems for Drin and Mat River 1.o ICB No Y Prior Basins Fierza and June 2009 1.3 Koman Geological 1.6 ICB No N Prior Monitoring System Lot 1: Fierza Dam Oct 2009 1.4.1 - Rehabilitation of 3 .O ICB Y N Prior Spillway 1.4.2 Lot 2: Vau i Dejes Spillway 1.8 Rehabilitation and I Stoplogs Install. I 1.4.3 I Lot 3: Koman Dam I Oct 2009 - Rehab of 2.0 ICB Y N Prior Spillway 3 1.4.4 Lot 4: Koman Dam Oct 2009 - Rehab of 1.o ICB Y N Prior Spillway 4 1.9 Koman Oct 2009 Hydropower Plant- 6.3 Prior Electromechanical and Safety Equip rehabilitation
1.10 Vau i Dejes and February Fierza 1.5 Implementation of Load Freauencv.- 1 control 1.4. I KESH Dam Safety 1 Nov 2008 Dept. - IT and 0.1 SH No N Prior Archiving
** Contracts 1.1, 1.2 and 1.3 are expected to be financed by SECO.
(b) All contracts will be subject to prior review by the Bank.
2. Consulting Services
(a) List of consulting assignments with short-list of international firms.
57 11 2 3 4 5 6 7
(b) All consultant services contracts will be subject to prior review,
The project procurement would be initially advertised in a General Procurement Notice following Board approval. The Bank will publish the GPN in the UNDB and in the Development Gateway’s dgMarket. The individual Requests for Expressions of Interest (REI) for consulting services will be advertised in a local newspaper of wide circulation. In addition, Requests for Expressions of Interests for consultants’ contracts above US$200,000 equivalent would be advertised on-line in UNDB and dgMarket.
The results of contract awards will be posted in UNDB online and dgMarket in accordance with Clause 2.60 ofthe Guidelines for Procurement under BRD Loans and Credits, and Clause 2.28 of the Guidelines for Selection and Employment of Consultants by World Bank Borrowers. These will also be posted on KESH’s website www.kesh.com.al.
The Borrower would follow the World Bank anti-corruption measures and would not engage services of firms and individuals debarred by the Bank. The listing of such debarred firms and individuals is located at: http://worldbank.org/html/opr/procure/debarr.html
58 Annex 9: Economic and Financial Analysis ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
202. Project Economic Analysis. The estimated net present value of the project is Lek 3,900 million at an assumed discount rate of 12%, and the estimated internal economic rate ofreturn is 47%. 203. The project would bring about three important benefits: (i)improvement of dam safety; and (ii)improved efficiency of operation; and (iii)integration within the regional electricity market. It was not considered feasible to undertake a cost-benefit analysis of the first benefit because ofthe difficulty ofestimating the probability offailure ofone or more ofthe dams in the absence ofthe project as well as the difficulty of measuring the consequences of failure, which would include destruction of power sector and other infrastructure, loss of energy production until the damaged facilities are repaired, possible loss of non-power production and possible considerable loss of life due to flooding. The investments designed to improve dam safety for which cost-benefit analyses will not be carried out include: dam safety alarm systems for the Drin and Mat River Basins (Euro 2 million); dam monitoring systems for the Drin and Mat River Basins (Euro 1 million); Fierze and Komani geological monitoring system (Euro 1.6 million); and KESH dam safety department equipment for data archives (Euro 0.1 million). The monitoring and safety alarm systems included in the project are now considered to be normal requirements at large dams everywhere. 204. Cost-benefit analyses were carried out for the investment and technical assistance sub- components designed to improve efficiency of operation. Three of the investment sub- components would involve elimination of water leakages, which would result in increased electricity production. These investments would also provide dam safety benefits, but these benefits are not being included in the economic analysis. These sub-components include: (i) Fierze - rehabilitation of spillway No. 3 (Euro 3 million); (ii)Vau i Dejes - spillway rehabilitation and maintenance stop-logs (Euro 1.8 million); and (iii)Komani - general rehabilitation ofspillways 3 and 4 -- seals, as well as frames, cylinders and hydraulic power units (Euro 3 million). The fourth sub-component that would improve efficiency of operation and be included in the economic analysis is Komani - rehabilitation of electromechanical equipment (Euro 6.3 million). This sub-component would result in increased electricity production from the rehabilitated units. The fifth sub-component included in the economic analysis would be the technical assistance for hydrology analysis and water management (Euro 1.5 million). Its benefit would consist ofreduced domestic plus import costs of supply resulting from improved reservoir operations. 205. The other sub-components for which it would not be feasible to do a cost-benefit analysis are the implementation of a load frequency control system at Vau i Dejes and Fierze (Euro 1.5 million), which is needed for integration with the regional market, and the other technical assistance sub-components with total estimated cost ofEuro 5.6 million. The economic analysis was done for 57% ofthe total project cost (excluding contingencies and items to be financed by EBRD and SECO). 206. The benefits of the reductions in leakages and rehabilitation of electromechanical equipment were measured by the estimated additional energy resulting from the investments
59 valued at the import price of electricity less transmission cost. The benefits of improved reservoir operations were measured by the estimated additional electricity supply attributable to the improved operations for average hydrological years valued at the electricity import price less transmission cost. The costs were taken to be the investments excluding contingencies. The cost and investment estimates exclude taxes and duties. 207. While the overall net benefits are very high, the rates of return of the spillway rehabilitation sub-components are all below 10%. However, including the dam safety benefits, if they could be measured, would undoubtedly raise the rates of return for these items to highly satisfactory levels. The rate of return for rehabilitation of electromechanical equipment at Komani is 15%, which is satisfactory. The rate for improved reservoir management is an enormous 217%. This reflects the low cost of the computer modeling needed to optimize reservoir operations procedures. Increasing average production by even one-half percentage point would give a favorable rate of return, but the likely increase is much larger, assuming the procedures determined by the model are implemented in practice. 208. Costs and Economic Rates ofReturn by Component are presented in the following table. ALBANIA ECSEE APLS-DAM SAFETY PROJECT COST-BENEFIT ANALYSIS
2009 2010 201 1 2012 2013 2014 2030 NPV IRR (Lek million) (%) Fieme: Spillway No. 3 Rehabilitation Project cost (Lek million) 125 187.5 62.3 Added power production (GWh) 3 3 3 3 Added power production (Lek million) 26.3 26.3 26.3 26.3 Net benefits (Lek million) -125 -187.5 -62.3 26.3 26.3 26.3 26.3 (167.3) 3%
Vau I Dejes: Spillway Rehabiitation Project cost (Lek million) 112 113 Added maintenance cost (Lek million) Added power production (GWh) 3 3 3 3 Added power production (Lek million) 26.3 26.3 26.3 26.3 Net benefits (Lek million) 0 -112 -1 13 26.3 26.3 26.3 26.3 (31.6) 9%
Komani: Spillway Rehabilitation Project cost (Lek million) 125 187.5 62.5 Added power production (GWh) 5 5 5 Added power production (Lek million) 43.9 43.9 43.9 Net benefits (Lek million) 0 -125 -187.5 -62.5 43.9 43.9 43.9 (70.6) 8%
Komani: Electromechanical Rehabilitation Project cost (Lek million) 157.5 157.5 157.5 157.5 157.5 Added power production (GWh) 20 20 Added power production (Lek million) 175.6 175.6 Net benefits (Lek million) -157.5 -157.5 -157.5 -157.5 -157.5 175.6 175.6 141.6 15%
Improved Reservoir Management Project cost (Lek million) 62.5 125 Added power production (GWh) 80 80 80 80 80 Added power production (Lek million) 702.4 702.4 702.4 702.4 702.4 Net benefits (Lek million) -62.5 -125 702.4 702.4 702.4 702.4 702.4 4,027.1 217%
Total Costs (Lek million) 345 707 520.3 220 157.5 0 0 Total Benefits (Lek million) 0 0 702.4 755.1 799.0 974.6 974.6 Net Benefits (Lek million) -345 -707 182.2 535.1 641.5 974.6 974.6 3,899.2 47%
60 Note. Additional electricity production is valued at the projected import price of Lek 9.88kwh less the projected transmission cost within Albania ofLek 1. lkwh. 209. Financial Analysis and Projections for KESH. With the present level of uncertainty due to the timing of DSO financial unbundling and asset allocation, the methodology and application of future tariffs, market liberalization in 2008, and possible privatization ofthe DSO, KESH is not confident ofpreparing robust financial projections. Once the tariff methodologies - currently prepared in draft form by the regulatory authority and to be negotiated during the pre- privatization consultations with prospective strategic investors for the DSO-- it is expected that financial projections will be prepared to accompany the next regulatory filing. 210. Nevertheless, a financial model was prepared for the analysis ofprivatization options for the sector and gives some indication of the future financial health of KESH. The company - following an adverse hydrology year in 2007-was obliged to import significant quantities of electricity at considerably higher prices than previous years. This has led to significant operating losses and debt accumulation (see also Annex Ifor KESH’s historic operational performance). The company ended 2007 registering short-term (overdraft) liabilities ofabout Lek 7.5 billion. 211. Despite transfers from the state budget and a settlement of past arrears between various pubic sector entities and KESH, the company registered losses of about Lek 12.5 billion (operating revenues of about Lek 26 billion and operating expenses at about Lek 40.5 billion). The major contributing factor to the almost doubling of operating expenses in 2007 has been the cost ofimported electricity ofabout Lek 24.5 billion. 212. KESH projects losses of Lek 5.7 billion for 2008, while projections for 2009 and 2010 would only turn a positive operating margin if a substantial average tariff increase takes place. According to the company’s projections the average tariff would need to be raised from Lek 8.04kwh to Lek 11.57kWh in 2009 and Lek 11.86kWh to return the company to profitability. However, the government is planning the privatization ofDSO in late 2008 and a new regulatory framework has been drafted to allocate tariffs among the DSO, the TSO, and the remaining parts ofKESH’s business unit (mainly generation). 213. KESH is expected to report for 2007 total assets of about Lek 111 billion with total liabilities of about Lek 62 billion and equity at about Lek 49 billion. However, a revaluation of business assets is currently under way and expected to be completed in summer 2008 on the basis of an impairment test. A government decision regarding the exact allocation of assets and liabilities to a privatized DSO will take place only together with the closing of the privatization transaction. Therefore, financial projections for each of the separate business units cannot be prepared with certainty at this point. 214. The following tables summarize past performance and three-year projections for KESH’s key financial statements for the expected unbundled companies and KESH as a consolidated entity and without taking into consideration the impacts ofthe privatization ofDSO.
61 KESH Balance Sheet (actuals to 2007,2008-1 0 projections)
62 KESH Profit and Loss Account (Actuals to 2007; Projections 2008-10)
63 KESH Cash-Flow (Actuals to 2007; Projections 2008-10)
64 Annex 10: Safeguard Policy Issues
ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
215. Environment. The project is rated category B. The program’s environmental impact is overall positive as it aims to prevent a dam failure and any accompanying environmental disaster. Its focus on improving hydrological analysis and monitoring and better water management will result in fkther positive environmental impacts. 216. The project’s physical infrastructure investments are of limited scope and will not change the existing levels ofthe dams. Potential environmental impacts concern mainly the management and disposal of limited waste during rehabilitation works. Changes in reservoir levels during plant shutdowns for rehabilitation works would be within normal operating levels. Any further critical physical infrastructure interventions that will be studied and specified during implementation and financed by EBRD will be evaluated from an environmental perspective before the EBRD project is approved.
217. Social. The sub-projects included in the project will not require any land acquisition. All civil works financed under the project are limited to activities on the dams owned by KESH, therefore none of these activities require land acquisition. The locations of the dams and the project works are not associated with any of the sometimes illegal and uncontrolled construction activity that takes place elsewhere in Albania. Furthermore, KESH {has provided} a statement attesting their ownership ofthe land on which these activities will be carried. 218. The key objective of the project is to enhance safety of energy dams managed by KESH along the Drin and Mat cascades. Provisions of OP4.37 (Safety of Dams) are fully incorporated in the project. At the same time, in addition to those provisions, the project features additional elements that are beyond the strict requirements of OP4.37. The following table illustrates the above by showing which elements of the project represent compliance with OP4.37, and which ones are additional ones. The latter have been considered necessary to achieve, and sustain, project’s objectives.
improvement Institutional strengthening on dam safety and I Sustainability ofproject objectives emergency preparedness KESH Dam Safety Dep. IT and archiving I Sustainability ofproject objectives
65 219. While OP 4.12 is currently not triggered, there is a possibility that it would be triggered once the additional dam safety measures under the Project, to be financed by EBRD and SECO, have been identified. Should, in the opinion of the Bank, such activities trigger OP 4.12, the necessary steps will be taken by the Borrower and the PIE in order to comply with OP 4.12 prior to the commencement of procurement for such activities. The Project Agreement includes a legal covenant to this effect.
66 Annex 11: Project Preparation and Supervision ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
Planned Actual PCN review 0 1/10/2008 0 1/ 10/2008 Initial PID to PIC 02/01/2008 05/15/2008 Initial ISDS to PIC 02/01/2008 05/15/2008 Appr ais a1 05/15/2008 05 /2 0/200 8 Negotiations 05/2 1/2008 05/21/2008 Board/RVP approval 06/2 6/20 08 06/3 0/2008 Planned date of effectiveness 09/30/2008 Planned date ofmid-term review 01/15/2011 Planned closing date 12/3 1/20 13
Key institutions responsible for preparation of the project: KESH
A large team ofBank staff and consultants worked on the ECSEE APL program, and these are listed below.
Bank staff and consultants who worked on the ECSEE APL5 Albania Dam Safety project included:
Name Title Unit ECSEE APL 5 - Albania Dam Safety Team Demetrios Papathanasiou Senior Energy Economist, Task Team Leader ECSSD Angelica Fernandes Procurement Specialist, PAS ECSPS Elona Gjika Financial Management Analyst ECSPS Natasa Vetma Environment a1 Specialist ECSSD Radhika Srinivasan Senior Social Scientist ECSSD Nicholay Chistyakov Sr. Finance Officer LOAGl Kirsten Burghardt Propst Counsel LEGEC Erjon Luci Economist ECSPE Yolanda Gedse Program Assistant ECSSD Elda Hafizi Program Assistant ECSSD Richard Hamilton Energy Economist, Consultant ECSSD Kishore Nadkarni Financial Analyst, Consultant SASE1 ECSEE APL Team Kari Nyman * Lead Specialist - ECSEE Team Leader, Romania, Croatia ECSIE Irina Kichigina Sr. Counsel LEGEC Rozena Serrano Program Assistant ECSIE Doina Visa Operations Officer - Romania ECSIE Doncho Barbalov Operations Officer - Bulgaria ECSIE
67 Nicholay Chistyakov Sr. Finance Officer LOAGl Bogdan Constantinescu Sr. Financial Management Specialist ECSPS Istvan Dobozi * Lead Energy Economist - Bulgaria ECSIE Stjepan Gabric Projects Officer - Croatia ECSIE Iftikhar Khalil * Lead Energy Spec. - Albania, Bosnia and Herzegovina ECSIE Ranjit Lamech * Sector Leader - Turkey IEF George Moldoveanu Team Assistant - Romania ECCRO Dejan Ostojic Sr. Energy Spec. - Regional Generation Investment ECSIE Gurhan Ozdora Sr. Operations Officer - Turkey ECSPF Alessandro Palmieri Lead Dam Specialist ESDQC Jonathan Pavluk Sr. Counsel LEGEC Leonid Vanian Sr. Procurement Specialist ECSPS Daniel Aizic Consultant - Financial Analyst __ Bernard Baratz Consultant - Environmental Specialist EASEG Ramon Lopez-Rivera Consultant - Engineering, Hydropower ECSIE Ludmilla Butenko Sr. Resource Management Officer SFRRM Amarquaye Armar Lead Energy Specialist EWDEN Patricio Marquez Lead Health Specialist ECSHD Yukari Tsuchiya Program Assistant ECSIE
*ECSEE APL program team members and task leaders for ECSEE APL country projects as listed above
68 Annex 12: Documents in the Project File ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
Energy Community
Energy Community information is available online at: http://www.seerecon.org/infrastructure/sectors/energy/index.html
ECSEE Treaty
Athens Memorandum, December 8,2003
Athens Memorandum, November 15,2002
Generation Investment Study for South Eastern Europe (2004)
Update of Generation Investment Study (2007)
ECSEE APLS-Albania Dam Safety
Dam Safety Survey for Hydropower Plants located on Drin and Mat River Cascades. Final Report September 2006. Electrowatt-Ekono (Jaakko Poyry Group) and CSD Environment and Geotechnics
Report on the State of Large Dams to the Council ofMinisters 2003. Albanian Commission of Large Dams
Feasibility Study for Dam Safety Investments at the Drin and Mat River Cascades. Inception Report February 2008. Poyry Energy
Prefeasibility Study for Rehabilitation ofElectromechanical Equipment of Koman Dam (KESH 2008).
Power Sector Action Plan 2007-2009
Power Sector Action Plan 2007-2009
69 Annex 13: Statement of Loans and Credits ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d PO96643 2007 BERIS 5.60 3.70 0.00 0.00 0.00 9.11 1.20 0.00 PO96263 2007 LAND ADMIN & MGMT PROJ 19.96 15.00 0.00 0.00 0.00 35.03 0.02 0.00 PO78949 2007 TRANSPORT 20.00 5.00 0.00 0.00 0.00 20.40 -0.04 0.00 P100273 2006 AVIAN FLU - AL 0.00 5.00 0.00 0.00 0.00 4.41 2.12 0.07 PO78933 2006 EDUC EXCEL & EQUITY 0.00 15.00 0.00 0.00 0.00 12.24 0.18 0.00 PO82814 2006 HEALTH SYST MOD 0.00 15.40 0.00 0.00 0.00 16.73 3.96 -0.03 PO90656 2005 ECSEE APL2 (ALBANIA) 0.00 27.00 0.00 0.00 0.00 26.68 6.23 0.00 PO86807 2005 COASTAL ZONE MGMT (APL #1) 0.00 17.50 0.00 0.95 0.00 14.90 8.93 0.00 PO82375 2005 NATURAL RES DEVT 0.00 7.00 0.00 0.00 0.00 5.30 2.40 0.00 PO82128 2004 WATER RES MGMT 0.00 15.00 0.00 0.00 0.00 5.59 -1.03 0.00 PO77526 2004 POWER SECTOR GENER & 0.00 25.00 0.00 0.00 0.00 26.16 23.68 -0.17 RESTRCT’G PO77297 2003 COM WRKS 2 0.00 15.00 0.00 0.00 0.00 1.75 0.42 0.05 PO41442 2003 MUN WATERIWW 0.00 15.00 0.00 0.00 0.00 4.01 0.16 0.00 PO55383 2001 SOC SERV DEVT 0.00 10.00 0.00 0.00 0.00 5.54 2.89 2.39 Total: 45.56 190.60 0.00 0.95 0.00 187.85 51.12 2.31
ALBANIA STATEMENT OF LFC’s Held and Disbursed Portfolio In Millions ofUS Dollars
Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 Fushe Kruje 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 2002 INSIG 0.00 0.00 6.23 0.00 0.00 0.00 6.22 0.00 2000 NCBank 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 1999 ProCredit ALB 0.00 0.98 0.00 0.00 0.00 0.98 0.00 0.00 2003 Vodafone Albania 17.83 0.00 0.00 3.70 17.83 0.00 0.00 3.70 Total portfolio: 47.83 2.98 6.23 3.70 47.83 2.98 6.22 3.70
Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2002 Savings Bank 0.00 0.02 0.00 0.00 Total pending commitment: 0.00 0.02 0.00 0.00
70 Annex 14: Country at a Glance ALBANIA: Energy Community of South East Europe APL Program - APL 5 for Albania DAM SAFETY
1966 1996 2005 2006 Growth of capltal and GDP (YO) (%of GDP) 100 T Agnculture 34.0 33.0 22.6 Industry 44.2 20.2 215 I son Manufactunng .. u.4 Services 216 46.6 55.7 Household final consumption expenditure 60.2 912 912 89.6 General gov't final consumption expenditure 9.3 9.7 9.3 6.9 imports of goods and services 15.5 35.2 45.9 46.5
198646 1996-06 2005 2o06 Growth of exports and imports ('h) (average annualgmvdh) Agnculture 4 1 14 26 Industry -112 66 -34 Manufactunng 56 Services -16 79 80 35 Househoid final consumption expenditure 29 73 86 06 General gov't final consumption expenditure -31 29 20 52 01 02 03 M 05 OB Gross capital formation 82 117 43 139 -Exports -imports Imports of goods and services 242 84 01 31
Note 2006 data are preliminaryestimates This table was producedfrom the Development Economics LOB database 'Thediamonds showfourkeyindicators in thecountry(in bo1d)comparedwthits income-groupaverage lfdata aremissing,thediamondwll be incomplete
Europe B Lower- POVERTY and SOCIAL Central mlddle- Albania Asla Income 2006 Population, mid-year (millions) 3.1 460 2276 Life expectancy GNI per capita (Atlas method, US$) 2,960 4,796 2,037 I GNI (Atlas method, US$ billions) 9.3 2206 4,635 7 Average annual growth, 2000-06 Population (%) 0.4 0.0 0.9 Gross Labor force (%) 0.2 0.5 14 wary Most recent estlmate (latest year available, 2000-06) capita enrollment Poverty (% of population beio w nationalpo vertyline) 25 Urban population (%of totalpopuiation) 46 64 47 Life expectancyat birth (pars) 75 69 71 1 Infant mortality(per (000iive births) 8 26 31 Child malnutntion (%of childrenunder5) 14 5 0 Access to improvedwatersource Access to an improvedwatersource (%ofpopulation) 96 92 61 Literacy(%ofpopulation age rS+J 99 97 69 Gross primaryenrollment (%of school-age population) 06 02 It3 -Albania Male 06 03 117 -Lo war-middiwnco me gro up Female 05 00 114 I KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986 1996 2005 2006 Economlc ratios' GDP (US$ billions) 2.2 3.0 8.4 9.1 Gross capital formatiorVGDP 30.9 22.0 23.6 25.6 Trade Exports of goods and serviceslGDP 15,l P.3 216 22.2 Gross domestic savingslGDP 30.5 -0.9 -0.5 13 Gross national savings1GDP 30.5 20.0 8.1 7.4 T Current account balancdGDP .. -3.6 -7.9 -8.0 Domestic Capital Interest paynentslGDP .. 0.2 0.3 savings formation Total debt1GDP .. 8.3 219 Total debt servicelexports .. 2.1 2.5 Present value of debt1GDP 16.5 $-I Present value of debtlekports 42.9 Indebtedness 1986-96 1996-06 2005 2006 2006-10 (averageannuaigm vdh) GDP -2.5 5.9 5.5 5.0 6.0 -Albania GDP per capita -2.6 5.7 4.9 4.7 4.6 -Lo war-middleincome gmup Exports of goods and services 25.1 211 7.2 7.3 9.7
STRUCTURE of the ECONOMY Albania
PRICES and GOVERNM ENT FINANCE i986 1996 2005 2006 Inflation (Yo) Domestic prices (%change) 10 T I Consumer pnces P7 24 24 Implicit GDP deflator -2 4 28 4 35 24 Government finance (%of GDP, includes current grants) Current revenue 48 7 158 24 9 25 5 01 02 03 W 05 Os Current budget balance 25 0 -6 2 12 18 -GDPdeflator -CPI Overall surplusldeficit -110 -4 1 -3 9
TRADE 1986 1996 2005 2006 Export and Import levels (US$ mill.) (US$ millions)
Totaiexports (fob) 229 652 750 3,000 T Agnculture 35 M ineral products 21 2,000 Manufactures 111 Total imports (cif) 92 1 2,397 2 68 Food 323 1,OW Fuel and energy 22 Capital goods 367 W 01 02 03 M OS 08 Eqort pnce mdex(2000s0OJ 121 QO Import pnce index (2000~00) Id iff I HEXports almports I Terns of trade (2000=00) '04 '02
BALANCE of PAYMENTS 1986 1996 2005 2006 Current account balance to GDP ('4 (US$ millions) I Eqorts of goods and services 327 373 1,623 1988 Imports of goods and services 336 1111 3.858 464 Resource balance -9 -739 -2,035 -2 ff6
Net income 0 72 144 52 Net current transfen 559 1229 1297 Current account balance -'07 -663 -727 Financing items (net) 163 766 807 Changes in net reserves 1 -56 .03 -80 Memo: Reserves includinggold (US$ miilions) 324 W63 1332 Conversion rate (DEC, local/USS) 80 04 5 99 9 98 5
EXTERNAL DEBT and RESOURCE FLOWS 1986 1996 2005 2006 IComposItlon of 2005 debt (US$ mill.) (US$ miliionsj Total debt outstanding and disbursed 49 1 1,839 IBRD 0 0 0 IDA 07 655 729 I G 2aa Total debt service 21 81 IBRD 0 0 0 IDA 1 0 0 Compositionof net resourceflow Official grants 1% 154 Official creditors 80 79 Pnvate creditors 4 34 Foreign direct investment (net inflow) 90 262 Portfolio equity(net inflow) 0 D 2Q World Bank program Commitments 63 52 0 A - IBRD E- Bilatera Disbursements 32 34 46 B - IDA D .Other rmlt~latera F- Private Pnncipal repayments 0 4 5 C-IMF G- Start-t~r Net flow 32 30 41 Interest pawents 1 5 6 Net transfers 31 24 35
Note This tablems producedfrorn theDavelopment Economics LDB database 9/28/07
72 Map section
IBRD 36174
18°30 19°00 19°30 20°00 20°30 21°00
CROATIA MONTENEGRO To Prizren 42°30 ValbonValbon Beli Drim 42°30
To Podgorica Bajram SERBIA Han i Curri
Drin Kopli
Lake Fierza Krum Shkodër Koman Laq i Laq i Koman Ligeni i RENC te Dejes Fierzes Kalimash Shkodër Puk Farrez Gjegjan
42°00 V.Dejes 42°00 Buene
Bushat SPAÇ
Shëngji Zall-ReZall-Re Lezhë Rubik Rrëshe Kurbnesh Shkopet Drini Zi Peshkopi Shutri ENERGY COMMUNITY F.Kuqe Laç Ulza Burreli Vojnik OF SOUTH EAST EUROPE Mamura Suç Kruj Bulqize APL PROGRAM - APL 5 FOR Fushë Krujë 41°30 F Y R 41°30
ALBANIA DAM SAFETY VorVor Crni Drim MACEDONIA TIRANA EXISTING TRANSMISSION LINES: Shkozet Shija Durrë Selite U.Trakt. 400 kV Tirana 220 kV IBE 110 kV or 150 kV Kavajë Librazhd Krrabë HYDROPOWER DAMS INCLUDED UNDER THE PROJECT Fiber Shkumbin Elbasan 1 EXISTING SUBSTATIONS Elbasan 2 Peqi Elbasan SELECTED CITIES Prenjas Lake K.Metal. NATIONAL CAPITAL Belsh Cërrik Ohrid 41°00 41°00 To Oher RIVERS Lushnje Kajan Guri Kuq INTERNATIONAL BOUNDARIES Lake Pogradec Prespes Grams Devoll Kuçovë
Adriatic Seman Fier Marinzë Uznovë Bera Mali Vjose Pato Zemblak Kafaraj Sea Ballsh Korçë Bilis
Osum 0 1020304050 Selenice 40°30 KILOMETERS 40°30 Vlorë 18°30 Mavrov To Kardhja
SWEDEN Ersek 10° 20° 30° Krahes LATVIA RUSSIAN Kelcyrë DENMARK FED. Baltic Memaliaj Sea LITHUANIA RUSSIAN Përmet FED. BELARUS NETH. POLAND Vjose GERMANY 50° GREECE 50° Gjirokastër LUX. CZECH UKRAINE REP. REP. VAK LO 40 00 FRANCE 40°00 ° S MOLDOVA AUSTRIA SWITZ. HUNGARY Delvin
SLOVENIA ROMANIA Bistrice CROATIA Sarand Kakavij This map was produced by the BOSNIA AND Adriatic HERZEGOVINA Map Design Unit of The World Bank. SERBIA Black The boundaries, colors, denominations ITALY MONTENEGRO Sea and any other information shown on Sea BULGARIA this map do not imply, on the part of FYR Area of map MACEDONIA The World Bank Group, any judgment on the legal status of any territory, or ALBANIA 40° 40° Tyrrhenian any endorsement or acceptance of 30° Sea Aegean GREECE such boundaries. Sea GREECE TURKEY 10° 20° 19°30 20°00 To Igumenice 20°30 21°00 MAY 2008