Completion Report

Project Number: 32036 Loan Number: 1887 December 2011

Maldives: Outer Islands Electrification (Sector) Project

CURRENCY EQUIVALENTS

Currency Unit – rufiyaa (Rf)

At Appraisal At Project Completion 15 November 2001 31 December 2009 Rf1.00 = $0.078 $0.078 $1.00 = Rf12.80 Rf12.80

ABBREVIATIONS

ADB – Asian Development Bank AGO – Attorney General‟s Office BPME – benefit and poverty monitoring and evaluation IA – implementing agency IDC – island development committee MAA – Ministry of Atolls Administration MEB – Maldives Electricity Bureau MPND – Ministry of Planning and National Development PCC – project coordinating committee PMU – project management unit RRP – report and recommendation of the President RUC – regional utility company SDR – special drawing right STELCO – State Electric Company

WEIGHTS AND MEASURES

kW – kilowatt kWh – kilowatt-hour MW – megawatt (1,000 kilowatts)

NOTES

(i) The fiscal year (FY) of the Government of Maldives ends on 31 December.

(ii) In this report, "$" refers to US dollars.

Vice-President X. Zhao, VPO1 Director General S. H. Rahman, South Asia Department (SARD) Director Y. Zhai, Energy Division, SARD

Team leader A Jeffries, Senior Energy Specialist, SARD Team member A Bernaldo, Associate Project Analyst, SARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Project Outputs 3 C. Project Costs 3 D. Disbursements 4 E. Project Schedule 4 F. Implementation Arrangements 5 G. Conditions and Covenants 5 H. Consultant Recruitment and Procurement 6 I. Performance of Consultants, Contractors, and Suppliers 6 J. Performance of the Borrower and the Executing Agency 7 K. Performance of the Asian Development Bank 8 III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 10 E. Impact 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 12 C. Recommendations 14 APPENDIXES 1. Project Framework 15 2. Project Implementation Schedule 18 3. Status of Compliance with Loan Covenants 19 4. Schedule of Contracts Awarded 26 5. Analysis of Subproject Operations and Technical and Financial Performance 27 6. Population, Customers, and Installed Capacity by Project Island 31

BASIC DATA

A. Loan Identification

1. Country Republic of the Maldives 2. Loan Number 1887 3. Project Title Outer Islands Electrification (Sector) Project 4. Borrower Republic of the Maldives 5. Executing Agency Ministry of Finance and Treasury 6. Amount of Loan SDR6,323,000 ($8 million equivalent) 7. Project Completion Report Number PCR: MLD 1284

B. Loan Data 1. Appraisal – Date Started 17 September 2001 – Date Completed 27 September 2001

2. Date of Board Approval 18 December 2001

3. Date of Loan Agreement 26 April 2002

4. Date of Loan Effectiveness – In Loan Agreement 25 July 2002 – Actual 25 July 2002 – Number of Extensions 0

5. Closing Date – In Loan Agreement 31 December 2005 – Actual 31 December 2009 – Number of Extensions 3

6. Terms of Loan – Interest Rate 1% per annum during the grace period and 1.5% per annum thereafter – Maturity (number of years) 32 – Grace Period (number of years) 8

7. Terms of Relending (if any) – Interest Rate 8% – Maturity (number of years) 12 – Grace Period (number of years) 4 – Second-Step Borrower none

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8. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval

18 December 2002 30 August 2010a 118 months

Effective Date Original Closing Date Time Interval

25 July 2002 31 December 2005 40 months

b. Amount (SDR) Last Original Revised Net Amount Amount Undisbursed Category or Subloan Allocation Allocation Available Disbursed Balance b Civil works, part A 5,000,000 5,019,791 0 5,039,264 (19,473) Consulting services, parts A & B 1,106,000 1,155,592 0 1,124,653 30,939 Legal advisory services 54,804 17,617 0 14,170 3,447 Interest during construction 130,000 130,000 0 108,120 21,880 Unallocated 52,000 0 0 0 0 Total (SDR) 6,323,000 6,323,000 0 6,286,207 36,793 Total ($) 9,666,977 9,666,977 0 9,480,074 55,460 a Financial closing was extended to allow for disbursements through August 2010. b Undisbursed balance cancelled on 30 August 2010.

9. Local Costs (Financed) - Amount ($) 131,610 - Percent of Local Costs 27.50% - Percent of Total Cost 0.97%

C. Project Data

1. Project Cost ($‟000) Cost Appraisal Estimate Actual

Foreign Exchange Cost 7,600 9,770 Local Currency Cost 3,000 3,857 Total 10,600 13,627

2. Financing Plan ($‟000)

Cost Appraisal Estimate Actual Implementation Costs Borrower Financed 2,600 4,147 ADB Financed 8,000 9,480 Other External Financing 0 0 Total 10,600 13,627 IDC Costs Borrower Financed 179 41 ADB Financed 551 125 Other External Financing 0 0 Total 730 166 ADB = Asian Development Bank, IDC = interest during construction.

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3. Cost Breakdown by Project Component ($„000) Component Appraisal Estimate Actual Part A: Expansion and Augmentation of Power Supply 8,546 12,921 to the Outer Islands Part B: Build the Capacity of Sector Institutions 467 470 Part C: Strengthen the Legal Framework for Island 69 70 Power Supply Utilities Interest During Construction 730 166 Taxes and Duties 788 0 Total 10,600 13,627

4. Project Schedule Item Appraisal Estimate Actual Date of Contract with Consultants 1. Consulting services implementation March 2002 4 December 2002 2. Legal advisory services March 2002 8 February 2004 3. Consultancy study tour March 2002 5 April 2004

Civil Works Contract 1. Part A: design–build and turnkey for batch 1 Date of award May 2003 12 April 2005 Completion of work May 2004 11 June 2006 2. Part A: design–build and turnkey for batch 2 Date of award November 2003 30 October 2006 Completion of work November 2004 18 May 2007 3. Part of design–build and turnkey for remaining batch 1 Date of award May 2003 1 July 2007 Completion of work May 2004 31 December 2009 4. Procurement of 11 kilovolt transmission link, Gaafu Alifu Kolamaafushi Date of award July 2004 30 April 2009 Completion of work June 2005 30 October 2009

5. Project Performance Report Ratings Ratings

Development Implementation Implementation Period Objectives Progress From 31 Jul 2002 to 31 Dec 2002 S S From 1 Jan 2003 to 31 Dec 2003 HS S From 1 Jan 2004 to 31 Dec 2004 S S From 1 Jan 2005 to 31 Dec 2005 S S From 1 Jan 2006 to 31 Dec 2006 S S From 1 Jan 2007 to 31 Dec 2007 S PS From 1 Jan 2008 to 31 Dec 2008 S PS From 1 Jan 2009 to 31 Dec 2009 S PS From 1 Jan 2010 to 31 Dec 2010 S PS HS = highly satisfactory, PS = partly satisfactory, S = satisfactory.

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D. Data on Asian Development Bank Missions No. of No. of Specialization Name of Mission Date Persons Person-Days of Members Project inception 24 Jun–3 Jul 2002 3 30 a, c Review 1 7–15 Apr 2003 3 20 a, c Review 2 19–22 Jan 2004 2 8 a Review 3 10–16 Aug 2004 2 14 a Midterm review 20 Sep–2 Oct 2005 4 52 a, b, c, d Review 4 28–31 Aug 2006 2 8 a, d Review 5 4–7 Dec 2006 1 4 a Review 6 1–5 Jul 2007 2 10 a Review 7 12–15 Nov 2007 1 4 a Review 8 2–5 Jun 2008 1 4 a Review 9 4–6 Nov 2008 2 6 a, c Review 10 18–19 Nov 2009 2 4 a, c Project completion review 15–17 Nov 2011 2 6 a, c a = energy specialist, b = finance specialist, c = project analyst, d = advisor, Asian Development Bank extended mission to the Maldives.

I. PROJECT DESCRIPTION

1. The goal of the Outer Islands Electrification (Sector) Project was to stimulate economic development and reduce poverty on selected outer islands, consistent with the intention of the Government of the Maldives to achieve more balanced economic growth and reduce the significant population pressure on the main island of Malé. The planned outcomes were to (i) affordably and sustainably improve the quality of electricity supply on outer islands, (ii) build the capacity of sector entities, and (iii) strengthen the legal framework for devolving responsibilities to outer island electricity suppliers.

2. As formulated in the Asian Development Bank (ADB) report and recommendation of the President (RRP),1 the project comprised the following outputs:

(i) Part A: expand and augment power supply to the outer islands by (a) expanding and augmenting power supply systems on about 40 focus islands to serve about 8,500 households with 45,000 members and (b) assisting in the implementation of engineering and project design, preparation of subproject appraisal reports, awarding of procurement and other contract, and supervision of construction, as well as building the capacity of government ministries for project management. (ii) Part B: build the capacity of sector institutions by (a) strengthening the Maldives Electricity Bureau (MEB)2 through helping it establish a clear mission statement, develop its professional capacity, establish safety and quality standards of electricity supply, set operational procedures for enforcing safety and quality standards, and develop comprehensive pricing principles for setting tariffs and (b) strengthening the capacity of the Ministry of Planning and National Development to carry out benefit and poverty monitoring and evaluation (BPME). (iii) Part C: strengthen the legal framework for island power supply utilities by (a) providing legal advisory services to the Attorney General's Office for developing a legal framework for island power supply utilities, cooperatives, and/or recognizing community groups and (b) training agencies on how to manage and operate cooperatives and on cooperatives law.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

3. ADB‟s country operational strategy was to reorient ADB operations away from improving physical infrastructure in Malé toward support for sustainable regional development across atolls to achieve a more equitable and cost-effective distribution of basic economic and social services. Project design was thus consistent with ADB‟s lending program. Project preparatory technical assistance included assessing electrification coverage, social and environmental impacts, and legal and institutional arrangements. The objective was to establish appropriate strategies for sustainably expanding and upgrading power supply systems on outer islands.3

1 ADB. 2001. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Maldives for the Outer Islands Electrification (Sector) Project. Manila. 2 The MEB was established in 1998 as the electricity sector regulator operating under the Ministry of Trade and Industry. 3 ADB. 1999. Technical Assistance to the Maldives for Preparing the Outer Islands Electrification Project . Manila (TA 3232-MLD, for $300,000).

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4. Project design and appraisal found that residents of outer islands generally had electricity. However, the power systems on the focus islands, which were operated by island development committees (IDCs),4 ad-hoc local organizations such as clubs and associations, or private providers, were inadequate. Island power-generating facilities were inefficient and poorly maintained, and distribution cables lacked the capacity needed for the load they were expected to carry. The quality of supply was poor and system losses high. As synchronizing facilities for generation were unavailable, only one generator could operate at a time, so supply was interrupted with each change of machine. In some cases, operating hours were restricted. The planned outcome of the project was therefore to upgrade or where necessary replace the existing power system to provide a quality of supply equivalent to that enjoyed by consumers on Malé. This was seen as a prerequisite to achieving more balanced economic growth.

5. The project was formulated as a sector project whereby the loan to the government to cover the capital cost of each project would be onlent to power system operators on individual islands. However, the IDCs and other community organizations that operated the power systems on most of the focus islands were not legal entities and thus unable to sign enforceable loan agreements. The government therefore decided to either prepare new legislation to provide for electricity cooperatives to be legally constituted on outer islands or amend existing laws to permit he recognition of IDCs and other island community groups as legal entities. Part C of the project helped the government develop an appropriate legal structure and train island agencies to operate and manage legally constituted electric utility cooperatives. The RRP provided that where an electricity supplier was a private company legally established under the Companies Act, and the island community preferred, the capital cost could be onlent to that company.

6. Regulating the sector was the responsibility of the MEB, which had a skeleton staff and ad hoc operational practices. The lack of a national regulatory code or standard for electricity supply was a factor in the poor quality of existing systems. As enforcement was a problem, electrical inspectors needed to be stationed throughout the archipelago. Also needed were more comprehensive pricing principles for setting tariffs, as well as government staff trained in BPME so that the impact of this and other ADB-funded projects could be properly assessed. Part B of the project addressed these needs.

7. During project formulation, the loan was considered sufficient to fund upgrading power systems on 40 islands, benefitting 8,500 households with 45,000 members. The government subsequently provided to ADB a prioritized list of 40 target islands. The basis for developing this list is unclear, and, apart from noting that islands supplied by the State Electricity Company (STELCO) were excluded,5 the RRP contained no explicit criteria for selecting and prioritizing beneficiary islands. It required, however, that no subproject proceed unless it could demonstrate an economic internal rate of return of at least 10% and forecasted revenue would be sufficient to cover all costs, including loan repayments, on a cash basis. 6 The loan agreement further required that the government select islands with special consideration given to those with high incidence of income poverty and vulnerability.

4 IDCs were community extensions of the Government of the Maldives and the primary institutions for developing and administering individual islands until they were replaced by elected island councils in February 2011. 5 STELCO is a government-owned corporation that supplies the main island of Malé and, until recently, 20 of the larger and more populated outer islands, which in total account for half of the population. STELCO was considered capable of independently funding and augmenting its own power supply systems. 6 The RRP included economic and financial analyses of a sample of six potential subprojects. The economic internal rate of return calculated for the six subprojects ranged from 13.3% to 24.9% and averaged 19.4%. It found that, on a cash breakeven basis, tariffs would fall in real terms on five of the six subproject islands. On the sixth island, Neykerendhoo, the real increase in tariff would be marginal. Of the six islands evaluated at appraisal, only three participated in the project. Two were dropped from the government‟s subsequent prioritized list, and one withdrew.

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B. Project Outputs

8. Under part A, the project provided new or upgraded power systems, which included powerhouses and generators totaling 6.2 megawatts of capacity and associated infrastructure and distribution networks on 19 outer islands, serving more than 5,700 customers and a population of 28,709. Under part C, the project funded a local consultant to provide legal advice to the Attorney General‟s Office, which led to Parliament‟s passage of the Cooperative Societies Act in early 2007. An assessment of project achievements, measured against the performance targets in the original project framework as presented in the RRP, is in Appendix 1.

9. Physical outputs under part A served fewer islands than envisaged, providing only 19 new or upgraded power systems, rather than 40.7 Factors reducing output included increases in equipment costs during the project, implementation delays, and contracting difficulties, as further detailed below.

10. Under part B, the technical consultancy firm engaged under the loan prepared a detailed report on the functions of the MEB and consequent organizational and staffing issues. It prepared accounting systems, a tariff-setting methodology, and utility guidelines, which the MEB did not act on before withdrawing from the project in August 2004. At the time, ADB was advised that this was because the MEB had no power to regulate or collect license fees from organizations that are not formally constituted as legal entities.

11. Under part C, the formulation and passage of the Cooperative Societies Act considerably lagged the implementation of part A, which proceeded without the establishment of legal entities or the signing of sub-loan agreements between the government and the authorities on each island. In late 2009, the government established regional utility companies in each of the seven provinces and transferred the project works to them to operate. However, some communities opposed this transfer, and five island councils continue to operate project facilities. At least one of these island councils has now formed a registered cooperative society, which would enable it to sign a sub-loan agreement in accordance with the provisions of the loan agreement between ADB and the government.8

C. Project Costs

12. A comparison of estimated and actual project costs is in Table 1. As the loan was denominated in special drawing rights (SDRs), the excess in loan disbursements over the loan amount of $8 million at appraisal reflects dollar depreciation during the project. The cost of project works was 50% higher than envisaged at appraisal, notwithstanding fewer islands being served. One reason was that equipment costs increased during the project, which is consistent with international experience across the sector.9 Second, several contract variations increased

7 Of the 40 islands prioritized by the government for inclusion in the project, 10 were not interested or withdrew, 1 was destroyed by the 26 December 2004 tsunami, 3 were deemed uneconomic, 5 were not appraised for lack of sufficient loan funding, and 2 were included in a tsunami-recovery project funded by ADB (ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Grant and Loan to the Republic of the Maldives for the Tsunami Emergency Assistance Project. Manila.). 8 During subproject site visits by the project completion review mission in September 2011, the island council of Guraidhoo showed a certificate showing its registration as a cooperative society as of 22 July 2010. 9 The appraisal cost estimate was undertaken when electrical equipment costs were generally reducing in real terms by the relocation of manufacturing to low-cost countries. By the early 2000s, these efficiencies had largely been achieved, and costs began to increase significantly as input commodity prices and labor costs rose.

4 costs.10 Further, consultancy costs were 36% higher than estimated at appraisal, even though capacity building under part B of the project was not implemented as envisaged at appraisal.11

Table 1: Project Costs ($‟000) Item Appraisal Actual Loan Disbursements Project works 7,415 11,191 7,655 Consulting services 1,667 2,270 1,658 Interest during construction 730 166 166 Taxes and duties 788 0 0 Total 10,600 13,627 9,480 Note: Numbers may not sum precisely because of rounding. Sources: The Government of the Maldives and the Asian Development Bank.

D. Disbursements

13. No disbursement schedule was prepared at appraisal, but a schedule of actual loan disbursements is in Table 2. It shows that by the original December 2005 loan closing date only $1.39 million, or 15% of the final loan amount, had been disbursed. This resulted from delays in recruiting the consultant, lengthy subproject appraisal and procurement processes, and delays in mobilizing the contractor for the first batch of subprojects. After this, project disbursements reflect the progress made on subproject works. Low disbursement in fiscal year (FY) 2007 followed the termination of the first batch contract, and higher disbursement in FY2009 and FY2010 indicates the pressure on contractors to complete project works before loan closure.12

Table 2: Loan Disbursements ($‟000) Fiscal Year Actual Accumulated 2002 0.10 0.10 2003 0.33 0.43 2004 0.39 0.82 2005 0.57 1.39 2006 2.35 3.74 2007 0.33 4.06 2008 0.95 5.01 2009 2.04 7.05 2010 2.43 9.48 Note: Numbers may not sum precisely because of rounding. Source: Asian Development Bank.

E. Project Schedule

14. A comparison of project implementation with the appraisal schedule is in Appendix 2. Three loan extensions added 4 years to implementation. An initial 8-month delay in mobilizing the technical consultant was because the implementing agency (IA) did not commence

10 For example, the new powerhouse location on Gaafu Alifu Kolamaafushi required an increase in voltage to 11 kilovolts and, therefore, an additional contract and additional cost of $354,000. 11 The increased cost for consulting services primarily reflected the need for more consulting services than originally anticipated. The termination of the batch 1 contract required complex re-contracting and bid evaluations for completing the remaining work. Further, contract variations on certain islands, including changes to powerhouse locations, required extensive redesign. 12 Disbursements in FY2010 were for physical work completed before loan closure on 31 December 2009.

5 recruitment until after the loan signing, notwithstanding prior approval for advanced recruitment. ADB approval of the first batch of appraisal reports was delayed by 3 months while issues relating to load forecasts were discussed with the consultant.13 Another significant factor was procurement delays for almost all contracts. The most significant factor was the poor performance of the first batch contractor, which required contract termination and demobilization followed by lengthy re-contracting and remobilization.

15. The IA had difficulty recruiting a local legal consultant to implement part C, largely for lack of interest from qualified practitioners. The Law Commission further delayed its required approval for submitting the draft act to Parliament, and Parliament further delayed before finally passing the Cooperative Societies Act in January 2007.

F. Implementation Arrangements

16. Before the project commenced, a project management unit (PMU) was set up in the Ministry of Atolls Administration (MAA) as agreed during project fact-finding and appraisal. However, the reorganization of the civil service and frequent changes in project manager hampered project implementation. Further, as government ministries are small, project managers were often assigned only part time. As project managers had little authority, they operated in effect as project administrators.

17. Significant project decisions were required from either the project coordinating committee (PCC) or an assistant minister. The PCC took direct responsibility for bid evaluation and contract award for the first batch of subprojects, which caused delays as members worked only part time on the project and often had incomplete knowledge of project requirements.

18. Coordination with communities on subproject islands was lacking. In accordance with ADB requirements, the project consultant held extensive discussions with local communities when designing and appraising individual subprojects. This created high expectations, which on some islands were followed by disillusionment when communities were not kept informed and promised project schedules were not met. On many occasions, contractors mobilized to a subproject island without the local community being advised in advance.

19. Communication shortfalls were caused mainly by changes in institutional arrangements, exacerbated by frequent reorganization of the civil service, which saw IA responsibility transferred from the MAA to the Ministry of Atolls Development; then to the Ministry of Energy, Environment, and Water; and finally to the Ministry of Environment and Housing. The transfer from the Ministry of Atolls Development impaired coordination with islands because the MAA and the Ministry of Atolls Development had developing remote atolls as their core function and thus frequent, routine contacts with authorities on subproject islands. However, the new IA did not have such direct contacts with remote atolls, making coordination much more difficult to manage from Malé.

G. Conditions and Covenants

20. The status of compliance with loan covenants is in Appendix 3. Compliance with covenants relating to installing project works and technical and financial management was good

13 The forecasted growth rates were high, indicating that the consultants anticipated suppressed demand greater than would normally be expected in locations with widespread poverty. ADB eventually accepted the reports without significant amendment, and there was no similar delay in the approval of the second batch of appraisal reports.

6 notwithstanding implementation delays, but compliance with covenants on institutional restructuring and strengthening and on benefit and poverty monitoring and evaluation were less consistent.

21. Parliament passed the Cooperative Societies Act in early 2007 but too late to be of use to the project. This act was fundamental to establishing the institutional structure agreed by the government to ensure project sustainability. The long delay in passing the act meant the local cooperatives that were to own and operate individual subprojects were never established, leaving IDCs or other groups to continue to operate them. Subsidiary loan agreements were never prepared or formalized.

H. Consultant Recruitment and Procurement

22. Consultants were recruited in accordance with ADB Guidelines on the Use of Consultants (2010, as amended from time to time). While ADB had approved advanced consultant recruitment, the recruitment of a project consultant did not commence until after the loan signing. The consultant did not mobilize until early December 2002, or 8 months later than scheduled in the RRP. The selected consultant was experienced in designing and installing small electrification systems on remote islands and had worked previously on ADB projects in the Maldives.

23. Procurement turned out to be far more complex than originally envisaged as the termination of the batch 1 contract left nine subprojects partly completed and requiring re- contracting. Attracting the interest of contractors was difficult because subproject sites were dispersed, contract sizes small, and contractors reluctant to take on partly completed and abandoned construction sites. A schedule of contracts awarded is in Appendix 4.

I. Performance of Consultants, Contractors, and Suppliers

24. Consultants. Given the challenges faced by the PMU and the poor performance of the contractor for the first batch of subprojects, the performance of the project consultant was critical to completing part A of the project. The consultants diligently prepared training materials under part B and provided training on location at subproject sites. The design and installation of the subprojects was to a high standard and fit for purpose. The consultant was required to be much more actively involved in project and contract management than usual. Given the challenges and constraints inherent in the advisory nature of their role, the consultants‟ performance was satisfactory.

25. Contractors. The performance of the original contractor for the first batch of subprojects was very poor, and the contract was terminated in June 2007, more than 2 years after award and with only three subproject power stations commissioned. The contractor‟s arrangements for project management were unsatisfactory. The lead contractor and project manager was based in Sri Lanka and apparently did no more than order equipment and engage local subcontractors. The contractor did not have a representative in Malé to manage the logistics of delivering equipment to the various project sites, monitor subcontractor performance, or coordinate their work. This poor performance demande contract termination, which inevitably caused further delays and costs in completing the remaining subprojects while alternative arrangements were made, increased the workload of implementation consultants and thus raising consulting costs. Impaired communications with the outer islands, the lack of sufficient personnel in the PMU, and poor contractor performance conspired to require so much attention and effort that it strained

7 the limited human resources that could otherwise have focused on the project‟s institutional aspects. This harmed the entire project and was a primary contributor to project shortfalls.

26. Although the contractor for the second batch of subprojects was the same consortium as for the first batch but with a local firm as the lead contractor,14 this contract was more successful as contract documents had been written to prevent a reoccurrence of the problems that delayed the first batch. In particular, for second batch subprojects the contractor was required to station a project manager in Malé with the budget and authority needed to effectively manage the work. Implementing this contract nevertheless took more than 3 years.

27. In late 2007, it was determined that there were sufficient funds available to allow two more subprojects to be constructed under the loan. These subproject islands had been appraised and included in the first batch contract. The islands had previously withdrawn, but the government subsequently allowed them to renter the project. This relatively small contract was awarded through international competitive bidding to a local contractor, which performed competently and completed the works in 15 months.

28. In conclusion, except for that of the first batch contractor, the performance of contractors is rated satisfactory.

J. Performance of the Borrower and the Executing Agency

29. Prior to loan approval, the government set up a PMU in the MAA headed by a full-time project manager. However, the original project manager lacked knowledge of ADB‟s operating procedures or sufficient decision-making authority. The functioning of the PMU was further hindered by frequent staff changes15 and a lack of operating continuity caused by civil service reorganization and the PMU‟s relocation into a series of departments.

30. The requirement that key decisions be made by the project director or the PCC was inefficient as they were not directly involved with the project and thus lacked full knowledge of the local consequences of their decisions. An example of this was the completion the batch 1 subprojects following the termination of the contractor. ADB and the IA agreed, on the advice of the consultant, that the most cost-effective way to complete the work would be to negotiate subcontract completion with the existing subcontractors, as they were already on site and knew what worked remained. 16 While this approach was used immediately following termination (Appendix 4), the PCC later decided to rebid the larger subcontracts, which incurred long delays and additional cost.

31. Issues with contract implementation, such as the termination of the batch 1 contract, meant that work on many subprojects stopped for lengthy periods. Island communities were not kept informed, and when subprojects were reactivated two local communities wanted significant changes, including changes to previously agreed powerhouse locations. 17 The government invariably agreed to such requests, requiring subproject redesign and contract variations and incurring delays and additional cost.

14 This contract was awarded 8 months before the first batch contract was terminated. 15 There were 12 project managers over the course of the project. 16 Consultation with ADB‟s Central Operations Services Office found single-source bidding justified as the remaining civil works were a natural extension of the earlier, terminated contract and changing subcontractors for small individual islands would not be economical or ensure compatible work quality. 17 The two islands were Gaafu Alifu Kolamaafushi and Shaviyani Kanditheemu.

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32. The institutional strengthening components of the project were generally unsuccessful. The MEB18 withdrew from the project in 2004. The executing and implementing agencies were committed to the project and genuinely interested in promoting long-term, sustainable operations, but the extreme challenges caused by the poor contractor performance and subsequent contract termination and lack of sufficient personnel prevented them from focusing on the institutional aspects of the project.

33. The performance of the borrower is rated partly satisfactory.

K. Performance of the Asian Development Bank

34. ADB undertook 13 review missions during the project, including the midterm review mission in late September 2005.19 ADB‟s performance in processing required approvals and other administrative matters in a timely way was satisfactory, with the one exception being the delay in approving the first batch of appraisal reports. ADB staff dealt constructively with the government on administrative issues.

35. Review missions focused on the award of contracts and subproject implementation, which overshadowed institutional development components and drew attention away from them. Even after it became clear that subsidiary loan agreements, a key feature of project formulation, would not be developed, no substantive high-level discussion seems to have taken place with the government on how this might be addressed.

36. ADB‟s monitoring of implementation was hindered by frequent staff changes, as there were five project officers over the life of the project, including three in the first 3 years of implementation.

37. The performance of ADB is rated partly satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

38. Prior to the project, ADB lending assistance to the government had focused primarily on electricity. ADB had provided the government with three loans totaling $22.3 million to improve electricity supply in the capital, Malé.20 As these loans had helped bring electricity supply in Malé to a reasonable standard, and STELCO was well managed and operating sustainably,21 it was appropriate for ADB to turn its attention to improving electricity supply on outer islands. This

18 The MEB has now been reorganized into the Maldives Energy Authority, whose mandate covers the whole energy sector, not just electricity. At the time of the project completion review mission, new staff were in place and the authority appeared to be operating more effectively. 19 At the time of the midterm review, 3 months before the original loan closing date, the first batch contractor had just mobilized but no substantive work had been completed. 20 ADB. 1987. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Maldives for the Power System Development Project. Manila (Loan 848-MLD(SF) for $6.1 million); ADB. 1991. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Maldives for the Second Power System Development Project. Manila (Loan 1121-MLD(SF) for $9.2 million); and ADB. 1997. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Maldives for the Third Power System Development Project. Manila (Loan 1532- MLD(SF) for $7.0 million). 21 With the establishment of RUCs in 2009, STELCO became responsible for electricity supply only in Capital Province, which includes islands in the Malé Atoll, with its power systems on other islands divested to RUCs.

9 was consistent with the government‟s objective of promoting more balanced economic growth to relieve population pressure on Malé.

39. A feature of project formulation was local management of the operation of individual subprojects after completion to ensure the long-term sustainability of operations. As subprojects were completed, they were operated by the island authorities as envisioned, but the intention that the operating entities become legally constituted island utility cooperatives was not realized at the time. After the 31 December 2009 loan closing, project facilities were transferred to the recently established RUCs to operate and maintain. Further details of this arrangement are described in the sustainability section below.

40. The RRP noted that the safety standard of the distribution network and house wiring was poor and that small private suppliers tended to ignore quality-of-supply requirements. This was a major concern to consumers, who invariably valued improved reliability and quality of supply as key project outcomes. Implementation consultants skilled in international safety standards ensured all subprojects were adequately constructed to high standards.

41. In summary, installing new or upgraded power systems on outer islands was relevant to the government‟s development objectives and ADB‟s country operational strategy study,22 and the purpose of institutional strengthening was to ensure the sustainable operation of these new assets. The need addressed by the project at both appraisal and completion was for reliable, efficient power supply on selected outer islands. The project is rated relevant.

B. Effectiveness in Achieving Outcome

42. The first planned outcome was to expand and augment the power supply on selected outer islands. This was to be achieved through project works implemented under part A, which were well designed and constructed. These works have enabled 28,709 residents of 19 islands to benefit from much-improved electricity supply, but fewer than the 45,000 residents envisaged at appraisal.

43. The second planned outcome was to build the capacity of sector institutions under part B of the project by (i) providing training on how to efficiently operate and manage subproject works and helping the MEB establish a clear mission statement, develop its professional capacity, establish safety and quality standards for electricity supply, set operational procedures for enforcing safety and quality standards, and develop comprehensive pricing principles for setting tariffs and (ii) strengthening the capacity of the Ministry of Planning and National Development (MPND) to carry out BPME.

44. The project consultant prepared a report on the organization and staffing of the MEB, detailed accounting systems, and tariff-setting guidelines. However, these reports were not used by the MEB, which withdrew from the project in August 2004 and declined assistance from the consultant toward developing technical standards and operating procedures. Further, the project consultant provided training to MPND staff on BPME, who were subsequently transferred to other ministries or left for further education. Ultimately, the MPND declined to participate in BPME, so no baseline survey took place as intended before subproject construction. Despite the intention of the executing agency and IA to rectify this and complete BPME, the IA did not have staff to conduct such monitoring, the value of which was diminished by the lack of baseline data that was supposed to be supplied by the MPND.

22 ADB. 1995. Country Operational Strategy Study, The Republic of the Maldives. Manila (STS MLD 95017).

10

45. Under part C, the third planned outcome was to establish a sustainable framework for the ongoing operation of subprojects by strengthening the legal framework for island power utilities. While legislation enabling the formation of legal cooperatives was enacted as a result of the project, this did not occur until January 2007, which was too late for establishing legal entities on each of the subproject islands to operate the project and take responsibility for repaying subsidiary loans. Hence, island authorities proceeded to operate facilities as they were completed without subsidiary loans in place.

46. The project is rated less effective in achieving outcomes. While the physical project works were of a high standard, they did not benefit the number of people envisaged at appraisal, even allowing for the rapid increase in electrical equipment costs in the years immediately following appraisal. Satisfactory institutional structures for operating and maintaining project works were established under the project, and the intended beneficiaries declined to participate in the capacity building offered by the project consultant. The project framework and summary of achievements is in Appendix 1.

C. Efficiency in Achieving Outcome and Outputs

47. Implementing part A of the project took more than twice the time envisaged at appraisal, and project costs escalated over this time. The lengthy and inefficient subproject appraisal process took over 2 years, and bid evaluation for the first contract package took over 1 year. Once construction commenced, delays were largely caused by very poor contractor performance, which exacerbated the problem of an understaffed IA.

48. Another significant issue was the number of contract variations. The government permitted island communities to withdraw from and re-enter the project. The two islands of Gaafu Alifu Kolamaafushi and Shaviyani Kanditheemu demanded, after the contractor had mobilized, changes to the powerhouse location agreed at appraisal, requiring extensive redesign of the distribution system. The government agreed to all these changes notwithstanding their adverse impact on project cost and schedule.

49. The project is rated less efficient. While the loan was fully utilized, only 19 subprojects were completed, rather than the 40 envisaged at appraisal. The government had no control over cost increases for imported electrical equipment that occurred in the years immediately following appraisal, and these cost increases undoubtedly made the full achievement of project goals at appraisal unrealistic. Nevertheless, delays, design changes, and the resulting increased need for consulting services ran up project costs and could have been avoided.

D. Preliminary Assessment of Sustainability

50. An analysis of the technical and financial performance of subprojects is in Appendix 5. Local operators received training in subproject operation and management as the works on each island were handed over, but this was subsequently superseded by the transfer of the subprojects to the RUCs that were established in December 2009. An RUC has been established for each of the seven outer provinces, and each is responsible for managing all utility operations on all inhabited islands within its jurisdiction. ADB was advised that RUC operations were overseen by the Public Enterprise Monitoring Bureau under the Ministry of Finance and Treasury, but it is understood that they are not yet required to prepare annual financial statements.

11

51. The operational performance of RUCs is difficult to judge, as they are in early stages of operation. Upper North Utilities, which now manages the facilities of six subproject islands, has financial and technical management reporting systems that allow the performance of each subproject to be properly monitored, and the maintenance of these subprojects was to a high standard. South Central Utilities, which has been allocated four subprojects but is operating only one, does not yet have a structured reporting system.23

52. The government subsidizes electricity sold by RUCs to domestic and commercial customers to the extent that domestic and commercial tariffs in subproject areas are lower in nominal terms than at appraisal, notwithstanding general cost inflation and a four-fold increase in the cost of fuel.24 Subsidies are provided for all domestic and commercial consumption up to 400 kilowatt-hours (kWh) per month. The subsidy amount is calculated for each RUC on a monthly basis depending on actual sales and is paid directly by the government to the RUC.

53. Electricity subsidies appear to have escalated since they were introduced in November 2009.25 At the time of the project completion mission in September 2011, they had reached $2 million per month but were under review. The subsidies appear to have created a sense of entitlement to cheap electricity, and domestic and business customers supplied by Upper North Utilities are now charged only Rf3.5/kWh for all consumption over 400 kWh in any month, even though no official government subsidy is paid for consumption this high. This is Rf2/kWh less than the approved tariff for domestic customers and Rf4/kWh less than the approved tariff for business customers. It does not appear sufficient to meet the cost of the fuel used to generate the electricity.

54. Customers supplied by subprojects that have not been transferred to RUCs are ineligible for the subsidy. However, domestic and business customers supplied by these subprojects are charged a tariff similar to the subsidized rate, while government customers are changed the full rate permitted by current regulations. These subprojects are at risk of not recovering their operating costs and requiring subsidies by other income available to island councils.

55. The sustainability of the project is thus less likely. This assessment recognizes that the powerhouse buildings and distribution systems have low maintenance costs and have been designed with sufficient capacity to meet the medium-term needs of all subproject islands. However, though the RUC arrangement has considerable advantages, it also has potential weaknesses. RUCs are responsible for utility operations across a range of sectors, including water, sewerage, waste management, and cooking gas supply. Some of these other functions are only marginally financially viable, and their investment requirements are likely to exceed the funds recovered through operations. Therefore, even if the power sector achieves full cost recovery, the financial position of the RUCs could be undermined by their other responsibilities. Much will depend on the success of the RUCs, which are still at an early stage of development.

23 The island councils on three islands, Meemu Muli, Faafu Nilandhoo, and Meemu Mulah, declined to allow the transfer of the assets and continue to operate them themselves, despite the subsidies provided by the government to domestic and commercial customers purchasing electricity supplied by RUCs. 24 At the time of the project completion mission in September 2011, residential electricity tariffs approved by the Maldives Energy Authority for the outer islands were as low as Rf2.20 per kilowatt-hour (kWh) net of the government subsidy. At the time of appraisal in 2001, tariffs on the six surveyed islands varied from Rf3.50 to Rf6.00/kWh, irrespective of household consumption. 25 Subsidies were first introduced in Malé in November 2009 and limited to domestic customers with a household income of no more than Rf74 per month. They were extended to outer islands managed by RUCs in April 2010, and in May 2010 eligibility was extended to all customers consuming less than 400 kWh per month. In September 2011, subsidies were available to all domestic customers on Malé that applied for them, irrespective of consumption, and all domestic and business customers on outer islands supplied by RUCs.

12

E. Impact

56. The project‟s impact (called the “long-term objective” in the RRP‟s 2001 terminology) is to achieve balanced economic growth and equitable regional development and thereby reduce poverty and vulnerability on the selected outer islands and significantly ease population pressure on Malé. The most immediate contribution of the project is to improve the quality and reliability of electricity supply on subproject islands. Though almost all customers on all subproject islands included in the project had electricity connections at the commencement of the project, most systems were in disrepair. Improvement through the project is likely to be sustained through the medium term because of the capacity built into the distribution networks provided and the provision to every project of synchronizing equipment for generation. Further, as project facilities were constructed on public land, there were no adverse socioeconomic impacts caused by the loss of private land. Proper fuel storage facilities, features to reduce generator noise, proper exhaust systems, and the running of distribution wiring underground contribute to reducing the environmental impacts that an integrated electric generation-and- distribution system invariably places on a small island community.

57. An assessment of the project‟s impact on the affordability of electricity is impossible at this time because subsidies are artificially reducing costs to customers, but the cost of electricity production on subproject islands is probably less than it would otherwise have been without the installation of more efficient generating equipment or reduced distribution losses.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

58. The project is rated partly successful. While beneficiaries are fewer than planned, the design of project works was to a high standard and consistent with appraisal expectations, and the islands served by the project now enjoy reliable power supply. Institutional structures to ensure the sustainable operation and maintenance of the project works were not established under the project as planned, and planned capacity building in the sector was not taken up by the government. However, though individual island utility cooperatives were not formed as planned, the project did manage to lay the legal and institutional groundwork that facilitated the subsequent formation of RUCs. The new arrangements for subproject operation by RUCs has the potential to ensure sustainable operations, provided that they maintain a sound financial footing and apply the necessary technical and financial skills.

B. Lessons

59. Island selection and subproject appraisal were inefficient, delaying the commencement of contract processing by over 2 years and suggesting a recommendation for altering the approach that is shown in the next section.

60. Forming separate, miniature utility cooperatives on individual islands with an average population of only 1,511 people, each with a separate loan agreement and inspector, proved very difficult to implement. This suggests that one island is too small a unit to justify this approach. The availability of technical expertise on each island varies significantly, and the requisite financial-management and tariff-setting expertise is scarce. The government‟s decision in 2009 to form RUCs was good for the project, as their taking over ownership and operation enables economies of scale and operational efficiencies, including more effective utilization of

13 technical and managerial skills across islands. Had RUCs existed at the beginning of the project and acted as IAs for clusters of projects within their territory, numerous implementation and coordination problems could have been avoided.

61. In formulating similar loan projects, ADB should ensure to the extent possible that achieving outputs is within the grasp of the IA. Depending on the MPND, an agency without a stake in the subprojects, to spearhead BPME proved problematic, as its withdrawal from that commitment left the IA unable to complete that part of the project.

62. Passing the Cooperative Societies Act, the necessary enabling legislation before subproject loan agreements were possible, was known at project approval to be the responsibility of Parliament and therefore something the government could guarantee. Yet project formulation as set out in the RRP implicitly assumed that this legislation would be passed in a timely manner and offered no robust contingency plan should the legal entities to operate subprojects fail to materialize.

63. For future projects located on numerous outer islands, formalized feedback channels from local IDCs to the IA should be established as part of project design.

64. A notable feature of this project was the difference in the performance of the batch 1 and batch 2 contractors, though both contracts were undertaken by the same consortium. The main difference was in project management requirements. Particularly for projects involving outer islands, which by their nature introduce communication and logistical challenges, ADB should ensure that bid documents specify minimum requirements relating to project and contract management, requiring bidders to fully describe planned contract and project management plans in their bids and stating that ADB will not approve contracts unless satisfied that these plans are adequate to ensure successful and timely completion.

65. ADB must supervise an IA more effectively if it has not established a prior record of successfully managing ADB-funded projects. ADB review missions throughout the project noted early warning signs that the project faced difficulties. More proactive and decisive action by ADB might have effected more efficient implementation. For example, when it became apparent that legislation would be delayed, ADB could have engaged the government to discuss an acceptable alternative, rather than simply leave it to a review mission to urge the government to take unspecified corrective action.

66. There are underlying systemic challenges associated with project implementation on the outer islands of the Maldives that must be considered in project design, as these conditions are different from those of other South Asian developing member countries. First, direct project oversight is more difficult because of transport issues unique to the archipelago.26 Second, a subproject on a particular outer island is naturally much smaller than infrastructure projects in larger countries. Third, the cost of hiring international consultants for long periods makes consultant costs disproportionately high when compared with direct project costs such as civil works, and the availability of local consultants may be limited in a small population.

26 Many outer islands are remote, with transport by lengthy, infrequent, and irregularly scheduled boat trips. The only alternative of hiring fast private boats is very expensive.

14

C. Recommendations

67. Particularly for projects on numerous outer islands, subproject site selection and appraisal regarding technical, financial, economic, and safeguard aspects should occur before loan approval. A technical assistance loan could, if sufficient technical assistance grant money is not available, fund consultants‟ appraisal of subprojects and be repaid using a portion of the project loan. In this way, the appraisal would be brought forward in the loan approval process but still ultimately funded by the project loan. This would help keep the task focused and better guided by budgetary and timeline parameters and allow the RRP to more accurately estimate costs and the number of islands to be served. Applying these subproject readiness milestones before approval, including advanced contracting, may delay project approval but would have shortened implementation in this case by over 3 years.

68. ADB should evaluate government staff resources realistically and provide additional consulting support as required. Implementation requirements, including those on oversight, monitoring, and reporting, should be reviewed and discussed with the government. The IA had committed, capable officers, but only two officers, and for long periods only one officer, served as the entire PMU while burdened with many other obligations. ADB and the government must jointly balance the contributions of available government officers and consultants to ensure all requirements are covered and proper budget allocations are included prior to the commencement of implementation. Further, consultants should be identified early, using advanced contracting if necessary, so that the implementation team is established, known, and assessed as adequate before implementation commences.

69. Though RUC operation of subprojects is viewed as positive, a sound investment would be technical assistance to improve their institutional capacity and establish organizational and management structures that capture the strengths and mitigate the weaknesses of the model.

70. Future power sector assistance in the Maldives should include building capacity in the Maldives Energy Authority, the successor of the MEB. Tariff-setting methodology and rationalization and the evaluation of power-purchase agreements are two areas of particular relevance.

71. Subsidies paid by the government to electricity consumers are substantial, discouraging efficient electricity use. Rationalizing tariffs would reduce the consumption of oil necessary to generate electricity and significantly contribute to the government‟s efforts to reduce carbon emissions.

Appendix 1 15

PROJECT FRAMEWORK

Performance Monitoring Assumptions Actual Design Summary Indicators/Targets Mechanisms and Risks Achievement Goal

Balanced economic Improved quality of Project benefit and Enough local The quality of growth and equitable electricity supply in poverty monitoring funds available electricity supply regional development the outer islands to and evaluation for on islands with to reduce poverty and promote local system implementing completed vulnerability of the economic National statistics the Project subprojects is of a outer island development Project progress Willingness of high standard. populations and Improved quality of reports stakeholders to Current power reduce population life and reduced Project completion upgrade their consumption pressures on Malé vulnerability of the report power supply exceeds original outer island systems estimates. populations

Purpose

Improving electricity Upgrading of Project progress Strengthened Upgraded supply in the outer electricity supply reports capacity of the electricity supply islands systems in about 40 ADB review implementing systems were outer islands on a missions agency through commissioned on sustainable and Accounts and consulting 19 subproject affordable basis records for services islands. electricity supply Island operations communities' Project completion understanding report and awareness of the improvement of electricity supply and of the establishment of legal island electricity supply utilities Building the capacity Building the capacity of the Operating of sector institutions of island electricity improvement of authorities at each supply utilities; electricity subproject strengthening sector supply and of received training. regulator (MEB); and the These entities did building the capacity establishment not, however, of agencies of legal island become legally concerned including electricity established island the Ministry of supply utilities utility cooperatives Planning and as intended. Tariff National setting and other Development and utility cooperative the Ministry of Atolls training manuals Administration were completed by the consultant, but the actual training could not be initiated.

Strengthening the Ownership and Timely The requisite law legal framework for accountability of submission of was eventually island electricity island communities the draft law to passed in January

16 Appendix 1

Performance Monitoring Assumptions Actual Design Summary Indicators/Targets Mechanisms and Risks Achievement supply utilities for the electricity Parliament 2007, too late to supply systems in allow establishing the outer islands formal ownership of the new electric systems. However, the government transferred the assets installed under the project to regional utility companies, which are legally established and centralized at the provincial level.

Outputs

Expansion and Quarterly Project Delays in Power supplies Expansion and augmentation of progress reports selecting and were expanded augmentation of power supply Loan review appointing and augmented on power supply to outer systems in about 40 missions consultants 19 islands serving islands focus islands to Project progress Delays in 5,700 households serve about 8,500 reports contract award and a population households with ADB review Willingness of of 28,709. 45,000 people, of missions island which approximately Accounts and communities to 50 percent subsist records for upgrade their on Rf15.0 ($1.27) or electricity supply electricity less per person per operations supply systems day Project completion report

Human resource Preparation of All 19 island development and electricity codes and subprojects were strengthening of standards built to a high sector agencies Professionalism of standard, though island electricity planned formal supply utilities and codes were not MEB achieved. MEB withdrew from project.

Strengthening of the Preparation of Parliament passed legal framework for legislation for an the legislation in island electricity appropriate January 2007. supply utilities framework to support the establishment of island electricity supply utilities, and/or the recognition of island community groups

Appendix 1 17

Performance Monitoring Assumptions Actual Design Summary Indicators/Targets Mechanisms and Risks Achievement Activities Quarterly progress Appointment of reports consultant ADB review and Detailed planning and approval of tender Design documents, Procurement of contract awards materials and and equipment disbursements Physical construction Review missions Testing and Project completion commissioning report.

Inputs

Total cost: $10.6 Project progress Adequate Total cost: $13.6 million. reports number of million. Foreign currency cost: ADB review review Foreign currency $7.6 million missions missions cost: $9.5 million Local currency cost: Project accounts Competent Local currency $3.0 million consultants cost: $4.2 million International and contractors International consulting services: Available consulting 30 person months counterpart services: 50 Domestic consulting staff person months services: 93 person Domestic months. consulting services: 188 person months.

ADB=Asian Development Bank, MEB = Maldives Electricity Bureau.

18

PROJECT IMPLEMENTATION SCHEDULE 2002 2003 2004 2005 2006 2007 2008 2009

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 Appendix

Engagement of consultants Key: Appraisal

2

Actual Part A: Augmentation of Power Supply First Batch Subproject appraisal reports

Preparation of bid documents and bidding

Supply, installation, and commissioning

Second Batch Subproject appraisal reports

Preparation of bid documents and bidding

Supply, installation, and commissioning

Third Batch Preparation of bid documents and bidding

Supply, installation, and commissioning

Part B: Institutional Capacity Building (i) Institutional strengthening of the Maldives Electricity Bureau

(ii) Benefit and poverty monitoring and evaluation

Part C: Strengthening the Legal Framework Legislative review and submission to Parliament

Source: Asian Development Bank.

Appendix 3 19

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Reference in Loan Covenant Agreement Status of Compliance The Borrower shall make available, Section 4.02 Complied with. promptly as needed, the funds, facilities, services, land and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project and for the operation and maintenance of the Project facilities. In the carrying out of the Project, the Section 4.03(a) Complied with. Borrower shall cause competent and qualified consultants and contractors, acceptable to the Borrower and the Bank. The Borrower shall cause the Project to be Section 4.03(b) Complied with. carried out in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to the Borrower and the Bank. The Borrower shall furnish, or cause to be furnished, to the Bank, promptly after preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as the Bank shall reasonably request. The Borrower shall make arrangements Section 4.05(a) Complied with. satisfactory to the Bank for insurance of the Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice. The Borrower undertakes to insure, or Section 4.05(b) Complied with. cause to be insured, the goods to be imported for the Project and to be financed out of the Loan proceeds. The Borrower shall maintain, or cause Section 4.06(a) Complied with. MoAD, MPND, and MEB to maintain, records and accounts adequate to identify the goods and services and other items of expenditure financed out of the proceeds of the Loan for their respective parts for the Project. The Borrower shall (i) maintain, or cause Section 4.06(b) Complied with. MoAD to maintain separate project accounts for the Project; (ii) have such accounts and related financial statements audited annually; and (iii) furnish to the Bank not later than nine months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors.

20 Appendix 3

Reference in Loan Covenant Agreement Status of Compliance The Borrower shall enable the Bank, upon Section 4.06(c) Complied with. the Bank‟s request, to discuss the Borrower‟s financial statements for the Project and its financial affairs related to the Project from time to time with the Borrower‟s auditors, and shall authorize and require any representative of such auditors to participate in any such discussions requested by the Bank, provided that any such discussion shall be conducted only in the presence of an authorized officer of the Borrower unless the Borrower shall agree otherwise. The Borrower shall furnish, or cause MAA Section 4.07(a) Complied with. to furnish, to the Bank all such reports and information as the Bank shall reasonably request concerning (i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof; (ii) the goods and services and other items of expenditure financed out of the proceeds of the Loan; (iii) the Project; (iv) the administration, operations and financial condition of the agencies of the Borrower responsible for the carrying out of the Project and operation of the Project facilities, or any part thereof; (v) financial and economic conditions in the territory of the Borrower and the international balance- of-payments position of the Borrower; and (vi) any other matters relating to the purposes of the Loan. The Borrower shall furnish, or cause MoAD Section 4.07(b) Complied with. to furnish to the Bank (i) quarterly progress reports on the carrying out of the Project within 30 days from the end of each quarter, and (ii) annual reports on compliance with the Bank‟s environmental requirements. Not later than 3 months after physical Section 4.07(c) Partially complied with. completion of the Project, the Borrower shall cause (i) MoAD to prepare and furnish Item (i) was complied with as the IA to the Bank a Project Completion Report; caused the consultant to prepare the and (ii) MPND to prepare and furnish to the project completion report. Item (ii) Bank the BPME report. (BPME report) was not produced. The Borrower shall promptly inform the Section 4.07(d) Complied with. Bank of any condition which interferes with, or threatens to interfere with, the progress of the Project, the performance of the Borrower‟s obligations under the Loan Agreement, the performance of the MOFT, MAA, MPND, AGO or MEB in the Project,

Appendix 3 21

Reference in Loan Covenant Agreement Status of Compliance the accomplishment of the purposes of the Loan, or the maintenance of the service thereof. The Borrower shall enable the Bank‟s Section 4.08 Complied with. representatives to inspect the Project, the goods financed out of the proceeds of the Loan, and any relevant records and documents. The Borrower shall ensure that the Project Section 4.09 Complied with. facilities are operated, maintained, and repaired in accordance with sound administrative, financial, engineering, environmental, and operational and maintenance practices. It is the mutual intention of the Borrower Section 4.10(a) Complied with. and the Bank that no other external debt owed a creditor other than the Bank shall have any priority over the Loan by way of a lien on the assets of the Borrower. To that end, the Borrower undertakes (i) that, except as the Bank may otherwise agree, if any lien shall be created on any assets of the Borrower as security for any external debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest charge and any other charge on, the Loan; and (ii) that the Borrower, in creating or permitting the creation of any such lien, will make express provision to that effect. The provisions of paragraph (a) of this Section 4.10(b) Complied with. Section shall not apply to (i) any lien created on property, at the time of purchase thereof, solely as security for payment of the purchase price of such property; any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after its date. The term “assets of the Borrower” as used Section 4.10(c) Complied with. in paragraph (a) of this Section includes assets of any political subdivision or any agency of the Borrower and assets of any agency of any such political subdivision, including the Maldives Monetary Authority and any other institution performing the functions of the central bank for the Borrower. The MoFT shall be the project executing Schedule 5, para. Complied with. agency, and shall be responsible for the 1 overall coordination of the project, and the approval and coordination of all

22 Appendix 3

Reference in Loan Covenant Agreement Status of Compliance disbursements. The MoAD shall be the Project Schedule 5, para. Complied with. Implementing Agency (IA), and shall be 2 responsible for the implementation and management of the Project, including the supervision of the Project Management Unit (PMU) which is headed by a full-time Project Manager. The PMU shall be responsible for the day-to-day implementation of the Project The PCC shall provide guidance to the Schedule 5, para. Complied with. PMU and assist with interagency 3 coordination of activities. The members of the PCC shall comprise senior officials and staff representing MoFT, MoAD, MPND, MEB, AGO, STELCO, and MHHE MoAD shall conduct awareness campaigns Schedule 5, para. Partly complied with. and training workshops for project 4 beneficiaries and island communities Items (a) and (b) were complied as throughout the Project on (a) the design, awareness campaigns were planning, and implementation of the conducted during subproject appraisal. Project; (b) operations and maintenance of Also, power station staff on each the power supply systems; (c) roles, rights, subproject island were given and responsibilities of all concerned operations and maintenance training. parties; and (d) the legal undertakings, liabilities, and responsibilities of Island Items (c) and (d), the roles, rights and Power Supply Utilities/cooperatives. responsibilities of all concerned parties and legal undertakings and liabilities were not adequately addressed. Within 6 months of the Effective Date, the Schedule 5, para. Complied with. Borrower shall submit to the bank for its 5 review proposed legislation to address the Note: The draft cooperatives law was formation of the Island Power Supply submitted to parliament in June 2005, Utilities to assume the responsibility for the and passed in January 2007. costs, management, and operations and maintenance of the electricity supply on the outer islands; and within 9 months of the Effective Date the Borrower shall submit such proposed legislation to the Parliament for approval. Until the proposed legislation becomes Schedule 5, para. Not complied with. No subsidiary loan effective, and in the event of any delay in 6 agreements were agreed or signed. the passage of the proposed legislation, the Borrower shall sign written agreements Note: most of the subprojects are now with islands representatives for the operated by government owned repayment of the subsidiary loan provided regional utility companies, so that under the Project. Upon the passage of the accountable operating entities are now proposed legislation, the Borrower shall in place. take all of the necessary actions to ensure that Island Power Supply Utilities are established and operated in accordance with the principles agreed with the Bank,

Appendix 3 23

Reference in Loan Covenant Agreement Status of Compliance and that the subsidiary loans are transferred to the Island Power Supply Utilities. The Borrower shall ensure that by 31 Schedule 5, para Not complied with. No new national December 2002 MEB has issued national 7(a) codes or standards have been issued. codes and standards for both power However, local language standards suppliers and consumers that were in operation at the time of appraisal are still being used. The Borrower shall ensure that by 31 Schedule 5, para Not complied with. December 2002, MEB has appointed an 7(b) electrical inspector in each of the atolls in the project area to enable regulation and enforcement of the quality and safety standards for power supply systems. By 31 December 2002, the Borrower has Schedule 5, para Not complied with. authorized MEB to impose licensing fees 7(c) on electricity service providers, which are adequate for its operation. The Borrower and MEB shall ensure that, Schedule 5, para. Not complied with. Electricity rates for at a minimum, the average unit levels of 8 domestic and business consumers in each island power supply utility are the project areas are subsidized by the sufficient to achieve cash break-even. government. The Borrower shall cause the Bank of Schedule 5, para. Not complied with. No subsidiary loan Maldives, pursuant to an agreement 9 agreements have been signed, between MoFT and the Bank of Maldives, to collect the payments of all subsidiary loans to the island communities. The Borrower shall ensure that the Schedule 5, para. Not complied with. No subsidiary loan subsidiary loans to the Islands Power 10 agreements have been signed, Supply Utilities/islands communities provide that the Borrower shall have a lien on the power supply systems until the full payment of the subsidiary loans to the Borrower. MPND shall submit a final BPME report of Schedule 5, para. Not complied with. MPND declined to the Project to the Bank within three months 11(a) participate. after completion of the Project. The island power supply utilities shall Schedule 5, para. Partially complied with. maintain satisfactory accounting records 11(b) that can generate regular management Note: While most subprojects reports. Each island power supply utility managed by regional utility companies shall prepare annual statements of income are maintaining satisfactory and expenditure, and assets and liabilities, accounting records, the regional utility and submit them to MoAD within six companies themselves are not yet months from the end of each fiscal year. producing annual accounts. MoAD, in coordination with MEB, MPND, Schedule 5, para. Complied with. and AGO shall prepare progress reports for 11(c) the project and submit them to the Bank on a quarterly basis. MoAD shall submit to the Bank annual Schedule 5, para. Complied with. reports on environmental requirements 11(d) within 90 days from the end of each year.

24 Appendix 3

Reference in Loan Covenant Agreement Status of Compliance The reports shall include (i) a copy of environmental and safety permits, licenses, or clearances; (ii) compliance with environmental requirements; (iii) violations, if any, of environmental requirements; and (iv) certifications of approval for corrective actions, or approved plans of correction, if any. MEB shall submit annually to the Bank a Schedule 5, para. Not complied with. MEB withdrew from report describing the activities carried out 11(e) project under Part B(i) of the project, including, among other things, institutional strengthening, inspection of island electricity supply systems, and tariff applications reviewed. The Borrower shall ensure that all Schedule 5, para. Complied with. environmental mitigation measures 12 identified in the Initial Environmental (All power stations were constructed to Examination are incorporated in the design a similar design approved by ADB and of subprojects, and are followed during all distribution was underground.) construction, operation and maintenance of the Project. Within two years of the effective date, Schedule 5, para. Complied with. MoAD shall submit to the Bank for its 13 approval all of the subproject appraisal (Note: The second batch of appraisal reports, endorsed by the relevant island reports was not submitted to ADB until representatives, and approved by MoAD January 2006, and thus was later than for each of the selected islands in the expected.) batch. The implementation plan for each subproject shall be prepared in close consultation with the island communities. Each subproject appraisal report shall be in form and substance acceptable to the Bank. The Borrower shall submit, for the Bank‟s Schedule 5, para. Complied with. approval, only proposed subprojects that 14 have a minimum economic internal rate of return of 10 percent. If a subproject involves land acquisition, the Borrower shall ensure that the subproject appraisal report include (a) confirmation that there is no resettlement and no impact on livelihood caused by the subproject; and (b) proof that the PMU has received approval from appropriate authorities of the Borrower for the allocation and use of the Borrower‟s land for the subproject. If a subproject does not involve land acquisition, the Borrower shall ensure that the subproject appraisal report affirmatively states that there is no land acquisition involved.

Appendix 3 25

Reference in Loan Covenant Agreement Status of Compliance The Borrower shall, in the selection of Schedule 5, para. Complied with. (The government focus islands for the Project, give special 15 provided the project consultants with a consideration to islands with a high list of candidate subprojects for incidence of income poverty and appraisal.) vulnerability.

26

SCHEDULE OF CONTRACTS AWARDED

Contract Final Amount Amount Appendix Number Contractor Contract Name Signing Date ($‟000)1 („$000)1 Comment Batch 1 1887/1 Namira Agas Hayleys Batch 1 12 Apr 2005 4,528.7 4,657.5 ICB (terminated 13 June 2007)

4

1887/1/01 Ahmed Razee Makunudhoo civil works 25 Jul 2007 20.1 22.4 Negotiated 1887/1/02 Adhi Construction Fonadhoo civil works 2 Aug 2007 13.3 15.1 Negotiated 1887/1/03 ALM Engineering M&E & distribution, Fonadhoo 30 Aug 2007 37.1 43.5 Negotiated 1887/1/04 Power Engineering Pvt Ltd Distribution works, Makunudhoo 4 Sep 2007 17.1 18.3 Negotiated 1887/1/05 UNI Company Pvt Ltd Civil works and distribution, Ihavandhoo 25 Oct 2007 29.2 29.2 Negotiated 1887/1/06 UNI Company Pvt Ltd Civil works, Thimarafushi 25 Oct 2007 36.6 36.6 National bidding 1887/1/07 Power Engineering Pvt Ltd M&E works, Makunudhoo 30 Jan 2008 33.1 39.4 National bidding 1887/1/08 Ahmed Ibrahim Civil works and distribution, Nilandhoo 6 Feb 2008 4.1 4.1 Negotiated 1887/1/09 Tropic Investments Pvt Ltd M&E works, Muli 10 Mar 2009 89.5 93.7 National bidding 1887/1/10 Tropic Investments Pvt Ltd Civil works, Veymandoo 3 Dec 2009 146.7 146.7 National bidding 1887/1/11 Tropic Investments Pvt Ltd M&E works, Veymandoo 53.4 53.4 National bidding 1887/1/12 Tropic Investments Pvt Ltd Civil works, Kendhikulhudhoo 3 Dec 2009 156.5 156.5 National bidding 1887/1/13 Tropic Investments Pvt Ltd M&E works, Kendhikulhudhoo 57.2 57.2 National bidding 1887/1/14 ALM Engineering M&E & distribution, Thimarafushi 1 Apr 2008 36.0 85.6 Negotiated 1887/1/15 Ali Moosa, Blaasamge Installation of streetlights, Ihavandhoo 15 May 2008 6.3 13.4 National bidding 1887/1/16 Adbdul Lateef Ahmed Distribution work, Muli 7 Jul 2008 27.3 31.8 National bidding 1887/1/17 Tacho Pvt Ltd Rectification of defects, Ihavandhoo 23 Jul 2008 17.9 17.9 National bidding 1887/1/18 Mohamed Rafeeu, Mariaaz Civil works, Muli 2 Oct 2008 39.0 41.5 National bidding 1887/1/19 Tropic M&E Services Pvt Ltd Distribution works, Kendhikulhudhoo 30 Jul 1009 85.9 90.3 National bidding 1887/1/20 Veymandhoo Distribution Distribution works, Veymandhoo 6.3 6.3 National bidding Marketech Maldives Pvt Ltd Rectification of defects, Fonadhoo 1.9 1.9 Negotiated Tacho Pvt Ltd Rectification of defects, Ihavandhoo 0.7 0.7 Negotiated Tacho Pvt Ltd Rectification of defects, Kelaa 0.3 0.3 Negotiated Pneumatic Pvt Ltd Rectification of defects, Muli 2.0 2.0 Negotiated Total Batch 1 5,446.2 5,665.4 Batch 2 1887/2 Hayleys Namira Agas Batch 2 13 Oct 06 3,306.7 3,853.7 ICB 1887/2/1 Power Engineering 11 kilovolt, Kolamaafushi 30 Apr 09 329.3 353.6 ICB Subtotal Batch 2 3,636.0 4,207.3 Batch 3 1887/3/A Tropic Investment Ungoofaaru electrification 13 Oct 08 647.1 636.1 ICB 1887/3/B Tropic Investment Manadhoo electrification 13 Oct 08 650.1 682.4 ICB Subtotal Batch 3 1,297.2 1,318.5 TOTAL 10,379.4 11,191.2 ICB = international competitive bidding, M&E = monitoring and evaluation. Note: For this table a conversion rate of $1 = Rf12.8 is assumed. Source: The Government of the Maldives.

Appendix 5 27

ANALYSIS OF SUBPROJECT OPERATIONS AND TECHNICAL AND FINANCIAL PERFORMANCE

A. Overview

1. This appendix provides a summary of the project completion review mission‟s analysis of the operating state of the subprojects when visited.

B. Subprojects in Upper North Region

2. Upper North Utilities, which manages six subprojects, requires its local managers to prepare monthly reports on each subproject. The reports for July and August 2011 were used to analyze the technical and financial performance of each subproject, with the findings summarized in tables A.5.1 and A5.2. Where information was not available from the reports or other sources, assumptions were made, mainly about input costs. While there were minor differences in the cost of fuel on each island, a standardized cost of Rf16 per liter of fuel oil and Rf84 per liter of lubricating oil was assumed. Salary costs were based on the number of staff employed and typical monthly salaries in the Maldives. Maintenance costs were based on assumptions in the project consultant‟s appraisal reports, escalated to present-day costs.

3. The technical analysis in Table A5.1 shows that electricity consumption has increased substantially since appraisal, with annual growth of up to 24%. This is much higher than forecast by the project consultant and unsustainable over the long term. In particular, average domestic consumption per household has more than doubled on all subproject islands. While some of this increase can be attributed to the project, it is likely that the significant government subsidies are the main cause, as some 60% of domestic electricity charges on subproject islands are subsidized by the government for domestic consumers. Table A5.1 shows that the project effectively and significantly reduced electricity distribution losses, which both provides an economic benefit and indicates the improved quality of supply. Non-domestic consumption has also increased, primarily because of increased government activity on each subproject island, the load required by new communications infrastructure, and additional street lighting load.

4. This additional load requires larger generators, and all subprojects have seen some of their generators originally installed under the project replaced by larger units. The mission considers these generators generally replaced earlier than necessary, as most were operated at well below their rated load.

5. The financial analysis in Table A5.2 shows that all subprojects in the northern region are likely covering their direct operating costs but that in most cases the margin is too narrow to cover depreciation and generator replacement. Fuel costs are more than 80% of operating costs for all subprojects, and fuel efficiency and distribution losses significantly affect the cost of generation. There is, therefore, a need for good technical management.

6. The government pays more than 40% of the revenue received by most utilities as subsidies for domestic and business consumers.

C. Subprojects in South Central Region

7. The south central region has four subprojects. Two are operated by island councils, one is operated by South Central Utilities, and one is not in use. As operating or financial records were not available for any of these subprojects, it was impossible to quantitatively evaluate their

28 Appendix 5 operation. Customers of the two subprojects operated by the island councils do not receive a government subsidy and, as the rates charged to domestic customers are comparable to subsidized rates charged by utility companies, the revenue received from these customers would not be sufficient to cover the cost of the fuel used to generate the electricity sold. While government customers are charged the full, unsubsidized rate approved by the Maldives Energy Authority, the total revenue received from the subprojects is unlikely to fully cover the fuel component of direct operating costs. Therefore, funds must be continually injected by the local community, which must also fund generator replacement.

8. On Veymandhoo a new powerhouse and distribution system were constructed under the project but are not in use. The reason for this is not entirely clear. The appraisal report was completed in 2003, but project delays meant the powerhouse and distribution network were not completed until late 2009. The mission understands that in the meantime the government provided to the community a new generator and the community itself purchased a second unit for installation in the existing powerhouse. By the time the subproject facilities were ready, the government had apparently already assigned them to South Central Utilities, and the island development committee decided not to hand over its generators for the utility to operate. As a result the island continues to be supplied with electricity from the old powerhouse and the old distribution system.

9. No detailed analysis was undertaken of Thimarafushi, which is operated by South Central Utilities, but the mission met a representative in Malé. The utility operates power systems on 18 outer islands, of which the one on Thimarafushi is the only loan subproject. It has insufficient technical expertise to support and monitor power system operations on individual islands and so relies on information provided by local operators. The information provided to the project completion review mission indicated that, while the existing subsidized rate was sufficient to cover operating costs on Thimarafushi, this was not the case on the other islands and that a significant rate increase would be necessary to cover the operating cost of all its power systems.

Appendix 5 29

Table A.5.1: Technical Performance of Upper North Region Subprojects

Item Neykurendhoo Kanditheemu Makunudhoo Ihavandhoo Keelaa Baarah Appraisal data year 2003 2003 2002 2004 2007 2007 Residential Sales (megawatt-hours/year) At appraisal 54 141 134 315 325 195 2011 285 490 555 782 537 375 Average Residential Consumption (kilowatt-hours/month) At appraisal 25 65 56 70 82 59 2011 113 163 170 162 144 119 Other Sales (megawatt-hours/year) At appraisal 20 75 16 132 119 42 2011 126 250 167 262 208 142 Peak Demand (kilowatts) At appraisal 31 60 49 123 124 67 2011 94 142 149 210 144 107 Electricity Generated (megawatt-hours/year) At appraisal 100 258 176 486 467 250 2011 478 820 754 1,186 792 561 Distribution Losses At appraisal (%) 26 16 15 (…) (…) (…) 2011 (%) 10 7 4 10 4 4 AAGR (% since appraisal) 24 17 19 13 14 21 Fuel Efficiency (kilowatt-hours/liter) 3.02 3.00 2.85 3.44 3.39 3.21 AAGR = average annual growth rate. Source: Asian Development Bank estimates.

30 Appendix 5

Table A.5.2: Financial Performance of Upper North Region Subprojects

Item Neykurendhoo Kanditheemu Makunudhoo Ihavandhoo Keelaa Baarah Revenue (Rf‟000) Residential, from consumers 814 1,267 1,435 2,295 1,342 905 Residential, from subsidy 1,092 1,916 2,134 2,996 2,071 1,467 Business, from consumers 132 258 249 253 191 154 Business, from subsidy 110 225 246 235 188 137 Government 966 1,790 960 1,860 1,537 956 Total 3,115 5,455 5,024 7,639 5,328 3,620 Total subsidy 1,203 2,141 2,380 3,231 2,259 1,604 Subsidy proportion of revenue (%) 39 39 47 42 42 44 Expenditure Fuel 2,534 4,376 4,232 5,517 3,741 2,800 Lubricating oil 64 120 78 140 100 107 Salaries 420 540 600 540 600 480 Maintenance 59 101 93 146 97 69 Total 3,077 5,137 5,003 6,343 4,538 3,456

Annual operating profit 38 319 21 1,295 789 164 Operating margin (Rf/kilowatt-hour) 0.09 0.43 0.03 1.24 1.06 0.32

Direct operating costs (Rf/kilowatt-hour) 7.50 6.94 6.93 6.08 6.09 6.68 Source: Asian Development Bank estimates.

Appendix 6 31

POPULATION, CUSTOMERS, AND INSTALLED CAPACITY BY PROJECT ISLAND Island Registered Population Number of Customers Installed Capacity 2006 kW Faafu Nilandhoo 1,625 299 504 Haa Alifu Kelaa 2,015 367 360 Haa Alifu Ihavandhoo 2,579 433 560 Laamu Fonadhoo 1,755 379 650 Haa Dhaalu Makunudhoo 1,373 290 260 Thaa Thimarafushi 2,417 304 268 Meemu Muli 781 304 520 Thaa Veymandoo 1,012 236 553 Noonu Kendhikulhudhoo 1,507 317 194 Haa Alifu Baarah 1,684 300 186 Thaa Guraidhoo 1,478 178 160 Gaafu Alifu Kolamaafushi 1,471 316 300 Meemu Mulah 1,467 331 240 Shaviyani Kanditheemu 1,213 311 210 Baa Kendhoo 1,045 178 60 Haa Dhaalu Neykurendhoo 1,277 300 160 Gaafu Alifu Maamendhoo 1,115 272 330 Raa Ungoofaaru 1,322 306 180 Noonu Manadhoo 1,573 299 504 TOTAL 28,709 5,720 6,199 Source: Government of the Maldives.