Technical Assistance Report Project Number: 38183 May 2006 Independent State of Samoa: Preparing the Power Sector Expansion Program (Cofinanced by the Government of Australia) The views expressed herein are those of the consultant and do not necessarily represent those of ADB’s members, Board of Directors, Management, or staff, and may be preliminary in nature. CURRENCY EQUIVALENTS (as of 17 May 2006) Currency Unit – tala (ST) ST1.00 = $0.362 $1.00 = ST2.762 ABBREVIATIONS ADB – Asian Development Bank AusAID – Australian Agency for International Development CDM – clean development mechanism EMP – environmental management and monitoring plan EPC – Electric Power Corporation IEE – initial environmental examination MOF – Ministry of Finance PDD – project design document RF – resettlement framework RP – resettlement plan TA – technical assistance WEIGHTS AND MEASURES GWh (gigawatt-hour) – 1,000,000 kilowatt-hour kW – kilowatt kWh – 1,000 watt-hour MW (megawatt) – 1,000 kilowatt watt – unit of active power TECHNICAL ASSISTANCE CLASSIFICATION Targeting Classification – General intervention Sector – Energy Subsector – Renewable energy generation Theme – Sustainable economic growth Subtheme – Fostering physical infrastructure development NOTES (i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, "$" refers to US dollars. Vice President C. Lawrence Greenwood, Jr., Operations Group 2 Director General P. Erquiaga, Pacific Department (PARD) Director I. Bhushan, Pacific Operations Division, PARD Team leader C. Litwin, Senior Economist, PARD Team members E. Brotoisworo, Senior Safeguards Specialist, PARD S. Blaik, Urban Development Specialist, PARD B. Reid, Financial Management Specialist, PARD o 172 o 40'W 171 30'W S A M O A PREPARING THE POWER SECTOR EXPANSION PROGRAM Safotu Fagamalo Falealupo o Samalaeulu o 13 30'S Safune National Capital 13 30'S Matavai Sataua Town International Airport Falelima Pu'apu'a National Road S A V A I ' I I S L A N D Ferry Route River Faga International Boundary Salailua Boundaries are not necessarily authoritative. Tuasivi Palauli Taga Salelologa Satupaitea Malua Fale'ula Faleolo APIA Apolima Is. Mulifanua Vaiusu Satapuala Lauli'i Manono Is. Saluafata Manono-uta Solosolo Fusi Falelatai Falefa Fagaloa Bay U P O L U I S L A N D 172 o 40'W Uafato Ti'avea 150 o 00'E 160 o 00'W Matautu Poutasi I o Lepa N o r t h P a c i f i c O c e a n n 14 00'S o t 14 00'S o e o 20 00'N r 20 00'N n Siumu a Salani t Lalomanu i PACIFIC REGION o Lotofaga n a MARSHALL ISLANDS l D a t e l i n e FEDERATED STATES OF MICRONESIA 0o 0o NAURU INDONESIA K I R I B A T I PAPUA N NEW GUINEA SOLOMON ISLANDS TUVALU P A C I F I C O C E A N SAMOA COOK 0 5 10 15 C o r a l S e a VANUATU ISLANDS o TONGA o 0 20 00'S FIJI 20 00'S Kilometers 6 - ISLANDS 1 6 4 3 A U S T R A L I A S o u t h P a c i f i c O c e a n R o o o M 150 00'E 160 00'W 171 30'W I. INTRODUCTION 1. During high-level country consultations in Manila in February 2006, the Government of Samoa reconfirmed its request to the Asian Development Bank (ADB) for a project preparatory technical assistance (TA) to continue its support for the power sector. The Government requested a strategic and long-term approach to the sector. The TA is included in ADB’s country strategy and program update (CSPU) 2005–2006 for Samoa. 1 Following the Government’s request, a TA fact-finding mission was fielded to Samoa from 6 to 10 March 2006 and reached an understanding with the Government on the TA’s outcomes, outputs, financing plan, implementation arrangements, and outline terms of reference. 2 The design and monitoring framework is in Appendix 1. 2. The TA will help the Government and the Electric Power Corporation (EPC) develop a power sector expansion program consisting of (i) a reform program to enable private sector participation and enhance efficiency in the sector; (ii) a program to reform EPC’s internal business and management processes to enhance governance and cost-efficiency of the utility; and (iii) preparation of a least-cost power sector investment plan to diversify the country’s energy resources, meet future load growth, and reduce the burden of diesel imports. The TA is expected to lead to another TA to help implement the agreed reform program and an ensuing sector loan3 for EPC’s power system expansion program. II. ISSUES 3. Developing indigenous and renewable energy resources to reduce the economy’s risk exposure to foreign exchange fluctuations and fuel price increases is a high development priority for the country and articulated in the Government’s Statement for the Development of Samoa 2005–2007. Imports of petroleum products accounted for 15% of Samoa’s total import expenditure in FY2005. EPC’s Corporate Plan (2005) identifies diversification through development of indigenous and renewable energy resources as a key priority to reduce current reliance on diesel as the primary source of energy. Fuel is by far the single largest expense item, representing 74% of total generation costs and 51% of EPC’s overall costs. This leaves EPC, and ultimately electricity consumers, highly exposed to changes in world market oil prices and foreign exchange rates. 4. In 2005, ADB assessed EPC’s financial management performance. The findings indicated that EPC has struggled to improve its financial performance, primarily because of inadequate cost recovery and poor revenue collections. The assessment also proposed strengthening EPC’s management and corporate governance capabilities to enhance transparency and cost-efficiency in the sector. EPC, as a corporate entity, has full autonomy of its daily operations and is governed by the Public Bodies (Performance and Accountability) Act (2001), but such autonomy has yet to be fully exercised. Improved business procedures and management and corporate governance of EPC are essential for cost-effective and financially sustainable delivery of electricity services. 1 ADB. 2004. Country Strategy and Program Update 2005–2006: Samoa. Manila, where the TA was initially listed as “Supporting Energy Sector Reforms” ($300,000). 2 The TA first appeared in ADB Business Opportunities as “Preparing the Power Sector Development Program” on 15 March 2006. 3 The proposed financing for the investment plan could also be considered under a multi-tranche financing framework. 2 5. Tariffs are approved by the Cabinet. An automatic tariff adjustment mechanism was established through a Cabinet directive in 2001. The mechanism was intended to enable timely tariff adjustments through a transparent and depoliticized process. While the mechanism allows changes in fuel prices and exchange rates to be automatically reflected in the tariff, it does not provide incentives for EPC to improve its operational efficiency. However, tariffs have not been adjusted regularly as expected. The first tariff increase since November 2001—15% in May 2005—was approved by the Cabinet. 6. The lack of a regulatory and appropriate pricing framework hampers the power sector’s capacity to deliver adequate electricity services to end consumers. EPC is currently the sole operator, generator, and distributor of electricity through the grid. A regulatory environment conducive to private sector participation is essential to enhance the capacity to meet future demand and improve sector efficiency. 7. EPC’s long-term planning capacity remains weak. EPC does not systematically forecast demand or prepare power system plans. Individual project investments are planned and implemented ad hoc. While EPC’s annual corporate plans indicate a list of investment projects planned for the near future, investment needs are not accompanied by financing plans. Given rising oil prices and growing power demand, there is an urgent need (i) to develop a strategic and long-term approach to diversify power-generation sources, (ii) reduce system losses, and (iii) improve reliability. III. THE TECHNICAL ASSISTANCE A. Impact and Outcome 8. The TA will (i) develop a power sector reform program to encourage private sector participation, including options for regulation; (ii) develop a program to reform EPC’s internal business and management procedures to enhance governance and cost-efficiency of the utility; and (iii) prepare a least-cost power sector investment plan to diversify energy resources, meet future load growth, and reduce the burden of diesel imports. The success of this TA is envisaged to lead to further TA support for reforms that will facilitate cost-efficient and reliable electricity services to end consumers, and to an ensuing loan to support the power system expansion program. The investment plan will help the country and EPC, and ultimately end consumers, reduce exposure to global fuel prices by promoting indigenous and renewable energy resources. B. Methodology and Key Activities 9. The sector structure, investment requirements, and regulatory and pricing framework needs for Samoa’s small open economy will be examined in detail to meet the reform objectives and to facilitate private sector participation. Advice on policy matters and stakeholder communication will be provided throughout the TA. The TA will help the Government promote renewable energy resources and private sector participation. 10. The TA activities are grouped into three components: (i) Component 1 comprises the development of an agreed time-bound regulatory reform program for the power sector. This work involves (a) assessing options for effective and independent regulation, (b) developing a legal and regulatory framework to implement the road map, (c) determining roles and functions of a 3 regulatory body, (d) developing an independent power producer framework, and (e) developing a tariff framework. The regulatory work involves a number of key stakeholders.