Report and Recommendation of the President to the Board of Directors Project Number: 50240-001 September 2019 Proposed Loan and Grant Solomon Islands: Tina River Hydropower Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy. CURRENCY EQUIVALENTS (as of 1 July 2019) Currency unit – Solomon Islands dollar (SI$) SI$1.00 = $0.13 $1.00 = SI$7.69 ABBREVIATIONS ADB – Asian Development Bank CO2 – carbon dioxide EIRR – economic internal rate of return EOCC – economic opportunity cost of capital EPC – engineering, procurement, and construction GGA – government guarantee agreement ha – hectare HEC – Hyundai Engineering Corporation Limited IFC – International Finance Corporation kV – kilovolts kWh – kilowatt-hour K-Water – Korea Water Resources Corporation MW – megawatt O&M – operation and maintenance PAM – project administration manual PPA – power purchase agreement SPC – special project company tCO2e – tons carbon dioxide equivalent TRHPO – Tina River Hydropower Project Office WACC – weighted average cost of capital NOTE In this report, “$” refers to United States dollars. Vice-President Ahmed M. Saeed, Operations 2 Director General Ma. Carmela D. Locsin, Pacific Department (PARD) Director Olly Norojono, Energy Division, PARD Team leader Anthony Maxwell, Principal Energy Specialist, PARD Team members Flordeliza Asistin, Senior Operations and Institutional Coordination Officer, PARD Ninebeth Carandang, Senior Social Development Specialist, PARD Eric Gagnon, Principal Procurement Specialist, Procurement, Portfolio and Financial Management Department Teresita Leono, Associate Project Officer, PARD Rommel Rabanal, Public Sector Economist, PARD Asghar Ali Syed, Principal Counsel, Office of the General Counsel Jean Williams, Senior Environment Specialist, PARD Peer reviewer J-K. Han, Energy Specialist, Central and West Asia Department 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 PROJECT AT A GLANCE MAP I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Summary Cost Estimates and Financing Plan 3 E. Implementation Arrangements 5 III. DUE DILIGENCE 7 A. Technical 7 B. Economic and Financial 7 C. Governance 7 D. Poverty, Social, and Gender 8 E. Safeguards 8 F. Summary of Risk Assessment and Management Plan 9 IV. ASSURANCES AND CONDITIONS 9 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 13 Project Classification Information Status: Complete PROJECT AT A GLANCE 1. Basic Data Project Number: 50240-001 Project Name Tina River Hydropower Project Department PARD/PAEN /Division Country Solomon Islands Executing Agency Ministry of Finance and Borrower Government of Solomon Islands Treasury 2. Sector Subsector(s) ADB Financing ($ million) Energy Large hydropower generation 30.00 Total 30.00 3. Strategic Agenda Subcomponents Climate Change Information1 Inclusive economic growth Pillar 2: Access to economic CO2 reduction (tons per annum) 49,500 (IEG) opportunities, including jobs, made Climate Change impact on the Medium more inclusive Project Environmentally sustainable Global and regional transboundary growth (ESG) environmental concerns ADB Financing Adaptation ($ million) 6.00 Mitigation ($ million) 24.00 4. Drivers of Change Components Gender Equity and Mainstreaming Governance and capacity Client relations, network, and Effective gender mainstreaming development (GCD) partnership development to partnership (EGM) driver of change Knowledge solutions (KNS) Knowledge sharing activities Partnerships (PAR) Official cofinancing Private Sector Private sector development Promotion of private sector investment (PSD) 5. Poverty and SDG Targeting Location Impact Geographic Targeting Yes Rural Low Household Targeting No Urban High General Intervention on No Poverty SDG Targeting Yes SDG Goals SDG7, SDG13 6. Risk Categorization: Complex . 7. Safeguard Categorization Environment: A Involuntary Resettlement: A Indigenous Peoples: C . 8. Financing Modality and Sources Amount ($ million) ADB 30.00 Sovereign Project grant: Asian Development Fund 12.00 Sovereign Project (Concessional Loan): Ordinary capital resources 18.00 Cofinancing 175.50 Abu Dhabi Fund - Project loan (Not ADB Administered) 15.00 Government of Australia - Project grant (Not ADB Administered) 11.70 Green Climate Fund - Project grant (Not ADB Administered) 16.00 Green Climate Fund - Project loan (Not ADB Administered) 70.00 Korea Exim Bank - Project loan (Not ADB Administered) 31.60 World Bank - Project grant (Not ADB Administered) 9.70 World Bank - Project loan (Not ADB Administered) 21.50 Counterpart 17.07 Government 17.07 Total 222.57 Currency of ADB Financing: USD 1 The project reduces greenhouse gas emissions. However, it does not fall under the eligibility criteria for climate mitigation finance as defined by the joint multilateral development bank methodology on tracking climate finance, which notes that not all activities that reduce greenhouse gases in the short Source: Asian Development Bank This document must only be generated in eOps. 23082019154220780816 Generated Date: 03-Sep-2019 15:39:46 PM Project Classification Information Status: Complete PROJECT AT A GLANCE term are eligible to be counted towards climate mitigation finance. Accordingly, greenfield fossil fuel projects are excluded, and climate mitigation finance is considered zero. Source: Asian Development Bank This document must only be generated in eOps. 23082019154220780816 Generated Date: 03-Sep-2019 15:39:46 PM o 'E HAWAII NORTHERN SOLOMON ISLANDS MARIANA ISLANDS GUAM MARSHALL ISLANDS TINA RIVER HYDROPOWER PROJECT N O R T H P A C I F I C O C E A N FEDERATED STATES REPUBLIC OF OF MICRONESIA PALAU ONTONG JAVA I N D O N E S I A NAURU (Lord Howe Atoll) PAPUA Ke Loma K I R I B A T I NEW GUINEA SOLOMON TUVALU Luaniua TIMOR-LESTE ISLANDS SAMOA VANUATU COOK o 'S o 'S FRENCH FIJI ISLANDS TONGA POLYNESIA Roncador Reef NEW A U S T R A L I A CALEDONIA Taro CHOISEUL PROVINCE S O U T H P A C I F I C O C E A N Papara Manning Strait Shortland Islands Vaghena Kia ISABEL N E W Z E A L A N D Vella Lavella PROVINCE Kolombangara Maravar Buala Ranongga Noro Gizo Munda Simbo Susubona Malu'u Sikaiana o 'E Blanche Channel Sepi WESTERN Indi Vangunu CENTRAL Auki MALAITA PROVINCE spensable Strait Rendova PROVINCE Florida PROVINCE Russell Oteotea Islands Savo Yandina Tulaghi HONIARA Aola Liwe TTINAINA RRIVERIVER HHYDROPOWERYDROPOWER PPLANTLANT Ulawa Avu Avu GUADALCANAL Duff Hauratarata PROVINCE Kira Kira Reef N S o l o m o n S e a Lata TEMOTU MAKIRA-ULAWA Nendo PROVINCE Bellona Island PROVINCE 0 100 200 Tinggoa Utupua S a n t a C r u z I s l a n d s Anuta Rennell Island Peou o Vanikolo 'S Kilometers RENNELL AND BELLONA o 'S PROVINCE Fataka Tikopia National Capital S O U T H P A C I F I C O C E A N Provincial Capital Town 17-2217 17SOL ABV 17-2217 17SOL International Boundary Boundaries are not necessarily authoritative. This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information. o 'E o 'E I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed loan, and (ii) a proposed grant, both to Solomon Islands for the Tina River Hydropower Project.1 2. The project will support the development of renewable energy to supply electricity to Honiara, the capital of Solomon Islands. The project will reduce the cost of power supply generation by replacing diesel power with hydropower, and reduce greenhouse gas emissions. It is estimated that, following the project, hydropower will generate 68% of Honiara’s electricity. Transaction technical assistance was used in project preparation.2 II. THE PROJECT A. Rationale 3. Solomon Islands has the fourth-largest economy among ADB’s 15 Pacific developing member countries, with a gross domestic product of just over $1 billion in 2016. However, annual per capita income is less than $1,800. Having withstood the impacts of the global financial and economic crises, the economy grew by an average of 6.6% in 2008–2011, driven by expansions in logging output and mineral extraction. Growth has since dropped to an average of just 2.6%, and is expected to remain low in the near term. The country’s longer term prospects depend on the development of more sustainable drivers of growth, including tourism and commercial services. This will need to be underpinned by a stable and reliable energy supply. 4. High tariffs from over-reliance on diesel power generation. Grid-connected electricity in Solomon Islands is generated and supplied by Solomon Power, a state-owned electricity utility company. Solomon Power provides electricity to the capital Honiara and eight isolated provincial centers on separate islands.3 Solomon Islands has a total population of 616,000, more than 10% of whom live in Honiara.4 Honiara has an installed electricity generation capacity of 34 megawatts (MW). Peak load on the Honiara grid is growing, having increased from 9.3 MW in 2003 to 15.8 MW in 2018. Solomon Power’s electricity supply relies almost entirely on diesel generation. The cost to Solomon Power of generating power from diesel decreased from $0.36 per kilowatt-hour (kWh) in 2014 to $0.26/kWh in 2018, mainly due to a decline in diesel prices. Similarly, retail tariffs paid by the consumer fell from $0.93/kWh in 2014 to $0.65/kWh in 2016, due in part to declining diesel prices and tariff reform.5 The high cost of electricity generation is negatively impacting economic growth, particularly in the commercial and tourism sectors.