Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No: 38158-ET PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 86.0 MILLION Public Disclosure Authorized (US$130 MILLION EQUIVALENT) TO THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA FOR A SECOND ELECTRICITY ACCESS RURAL EXPANSION PROJECT Public Disclosure Authorized June 7,2007 Energy Team Sustainable Development Department Africa Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective March 3 1,2007) Currency Unit = Ethiopian Birr ETB8.89 = US$l US$1.51326 = 1 SDR FISCAL YEAR July 8 - July 7 ABBREVIATIONS AND ACRONYMS ADLI Agricultural Development and Light Industrialization AfDB African Development Bank APL Adaptable Program Loan BADEA Arab Bank for Economic Development in Africa CASASN Country Assistance StrategyAnterim Strategy Note CDD Community Driven Development CDM Clean Development Mechanism CFL Compact Fluorescent Lamp DBE Development Bank of Ethiopia DSCR Debt Service Coverage Ratio DSM Demand Side Management EAREP I1 Second Electricity Access Rural Expansion Project EEPCo Ethiopian Electric Power Corporation EIRR Economic Internal Rate of Return EMCP Expenditure Management and Control Sub-program EMP Environmental Management Plan EEA Ethiopian Electric Agency EMU EEPCo’s Environmental Monitoring Unit ENTRO Eastern Nile Technical Regional Office EPA Ethiopian Environmental Protection Authority EPSEMP Ethiopian Power System Expansion Master Plan EREDPC Ethiopia Rural Energy Development and Promotion Center ESMF Environmental and Social Management Framework ETB Ethiopian Birr FA Fiduciary Assessment FIRR Financial Internal Rate of Return FRR Financial Rate of Return FY EEPCo’s fiscal year, beginning July 8 and ending July 7 GDP Gross Domestic Product GoE Government of Ethiopia GNI Gross National Income GPOBA Global Partnership Output Based Aid ICAS Interim Country Assistance Strategy ICs National Interconnected System, namely the interconnected electricity grid IDA InternationalDevelopment Association .. 11 FOR OFFICIAL USE ONLY IFPRI InternationalFood Policy Research Institute IPP Independent Power Producer Iu ImplementationUnit JBAR Joint Budget and Aid Review JB S Joint Budget Study LED Light Emitting Diode LBOP Lighting the Bottom ofthe Pyramid LRAIC Long Run Average Incremental Cost LRMC Long Run Marginal Cost Large Towns Towns with populations ranging from 4,000-1 5,000 MDGs Millennium Development Goals MFI Micro Financing Institution MW Megawatt NBE National Bank of Ethiopia NPV Net Present Value O&M Operation & Maintenance OBA Output Based Aid PASDEP Plan for Accelerated and Sustainable Development to End Poverty PEFA Public Expenditure and Financial Assessment PFM Public Financial Management POM Project Operational Manual PSCAP Public Sector Capacity Building Program PV Photovoltaic RAP Resettlement Action Plan RE Rural Electrification REB Rural ElectrificationBoard REES Rural ElectrificationExecutive Secretariat REF Rural ElectrificationFund ROE Return on Equity RPF Resettlement Policy Framework for the Project, dated February 2006 Rural Towns Large and small towns and villages scs Self Contained Systems, namely isolated electricity grids SDPRP Sustainable Development and Poverty ReductionProgram Small Towns Towns with populations ranging from 1,500 to 4,000 SRMC Short Run Marginal Cost SSMP Sustainable Solar Market Package SWAP Sector Wide Approach ToU Time of Use Rates UEAP Universal Electricity Access Program UEAP Office Universal Electricity Access Program Office, within EEPCo Villages Towns with populations of less than 1,500 5YPSIP Five Year Power Sector Investment Plan Vice President: Obiageli Katryn Ezekwesili Country Director: Ishac Diwan Sector Manager: S. Vijay Iyer Task Team Leader: Luiz Maurer This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. ETHIOPIA SECOND ELECTRICITY ACCESS RURAL EXPANSION PROJECT TABLE OF CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE.................................................................. 1 1. Country and Sector Issues ....................................................................................................... 1 2 . Rationale for Bank Involvement ............................................................................................. 9 3. Higher Level Objectives to which the Project Contributes ................................................... 10 B. PROJECT DESCRIPTION ............................................................................................... 10 1. Lending Instrument ............................................................................................................... 10 2 . Project Development Objective and Key Indicators ............................................................. 11 3 . Project Components .............................................................................................................. 11 4 . Lessons Learned and Reflected in the Project Design .......................................................... 13 5. Alternatives Considered and Reasons for Rejection., ........................................................... 15 C. IMPLEMENTATION......................................................................................................... 15 1. Partnership Arrangements (ifapplicable) ............................................................................. 15 2 . Institutional and Implementation Arrangements................................................................... 16 3 . Monitoring and Evaluation of OutcomesResults ................................................................. 17 4 . Sustainability ......................................................................................................................... 17 5 . Critical Risks and Possible Controversial Aspects ............................................................... 18 6. Credit Conditions and Covenants.......................................................................................... 19 D. APPRAISAL SUMMARY .................................................................................................. 20 1. Economic and Financial Analyses ........................................................................................ 20 A . Economic Analysis .......................................................................................................... -21 B. Financial Analysis ............................................................................................................... 26 2 . Technical ............................................................................................................................... 30 3 . Fiduciary ............................................................................................................................... 31 4 . Social ..................................................................................................................................... 32 5 . Environment .......................................................................................................................... 32 6. Safeguard Policies ................................................................................................................. 33 7. Policy Exceptions and Readiness .......................................................................................... 34 iv Annex 1: Country and Sector or Program Background ............................................. 35 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ..... 50 Annex 3: Results Framework and Monitoring............................................................. 53 Annex 4: Detailed Project Description.......................................................................... 55 Annex 5: Project Costs .................................................................................................... 66 Annex 6: Implementation Arrangements ..................................................................... 67 Annex 7: Financial Management and Disbursement Arrangements ......................... 81 Annex 8: Procurement Arrangements ......................................................................... 90 Annex 9: Economic and Financial Analysis.................................................................. 99 Annex 10: Safeguards Policy Issues ............................................................................ 124 Annex 11: Project Preparation and Supervision........................................................ 126 Annex 12: Documents in the Project File.................................................................... 128 Annex 13: Statement of Loans and Credits ................................................................ 130 Annex 14: Country at a Glance................................................................................... 132 Annex 15: Map (IBRD 35496) ..................................................................................... 134 V ETHIOPIA SECOND ELECTRICITY ACCESS RURAL EXPANSION PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTEG Date: June 7,2007 Team Leader: Luiz Maurer Country Director: Ishac Diwan Sectors: